Jason Zweig, author of the Wall Street Journal’s Intelligent Investor column, wrote an interesting article regarding confirmation bias for today’s paper. Confirmation bias refers to the tendency of individuals to seek out information that confirms preconceived opinions or ideas. This tendency can exist in all aspects of life but is particularly dangerous when it impacts investment decisions.
Any investor who is willing to honestly reflect on his or her decision making process should be able to identify cases where confirmation bias played a role in errors. Mr. Zweig has one suggestion in the video shown below that I have been using myself for several years. He suggests that investors must write down their rationale for making a decision along with scenarios that would disprove the original thesis. Having this type of documentation available can counter the natural tendency to fall into the trap of confirmation bias if subsequent events are unfavorable.