Confirmation Bias

Confirmation Bias

What is Confirmation Bias?

Confirmation Bias is when you only look for evidence that supports your point of view.  This general statement is screaming for an example.  I’m going to give you a fictitious example to protect the guilty and the foolish.  Let’s consider the theoretical, security: Blue Vapor Super Awesome Industries (BVSAI) which specializes in making vaporware for mobile devices and corporate consumers.  

You might be a big fan of BVSAI for some of the following reasons:

  • Dominating the vaporware market will lead to more domination (circular logic).
  • They have a unique platform, different then everyone else’s (this may be irrelevant).
  • They have improved security over other vaporware developers (this is opinion, not fact).
  • BVSAI was the first into the vaporware marketplace, so they understood vaporware better than anyone else (non causal relationship: being first does not cause proficiency).
  • BVSAI is pioneering vaporware as a service (what is vaporware as a service?).
  • They understood how to speak vapor to the corporate world (oh no! Bafflegab!).

What is vaporware?  

Vaporware is software you pay for but is essentially useless or non-existent.  Surely, such a thing can’t exist!  Companies, executives and investors can’t be fooled into buying something that doesn’t exist?  However, Investors often buy stocks in companies that they don’t know about, Executives often sign contracts for products that don’t work.  

So how could it be that anyone would buy or invest in BVSAI, a vaporware company?  A common reason is most people pull out their keyboard and do an internet search; and that’s where the fun begins.

Confirmation Bias is Abundant on the Internet.

Because of the wide array of reporters, op-eds, websites, advertisements, blog posts, social media posts just about any opinion can be justified by the simple logic of, “I found an article about it, it must be true.”  Unfortunately, there is no guarantee that what you are reading is correct, even if the author is well intentioned and following sound academic protocols.  If the article is an “op-ed”, there is absolutely no guarantee that the article is accurate.  An “opinion piece” is based on opinion and need not contain any facts.  And finally, you should be very wary of obtaining anything that you want to believe as truth from social media.

Try sitting down and asking your search engine, “Why is BVSAI stock going to rocket?” you will get a whole webpage full of encouraging search results.  The search engine is simply trying to find what you are looking for.  It’s doing its job!  

Then try asking the opposing question, “why is BVSAI stock going to tank?” you will get an equally impressive array of webpages, blogs, posts, columns which say exactly what you think is going to happen.

Unfortunately, this is what the internet does: it finds content that it believes you want to see.  There is no checkbox for, “I only want to see content based on fact.”

What Confirmation Bias does to you.

In the financial world we are warned that confirmation bias will cause you to under diversify your portfolio.  Because you think you might have the next big winner; you will be tempted to concentrate in that position.  Confirmation Bias implies you are missing something, you are mis-pricing the value of what you are investing in and that will become evident as your investments underperform or even loose value.  

Confirmation Bias can sink all your plans and investments.
Confirmation Bias can make you double down to massive losses.

A quick note on Confirmation Bias and Doubling Down.

If you are mistaken, the most dangerous thing that you can do is double down or extend your exposure.  Whatever price you were going to pay for mis-reading that position is going to be greater if you continue to extend into the position; a smart investor knows when to get out and minimize losses.  In theory, going all in can work, but it normally doesn’t.  If you continue to double down, there will be a margin call, or day of reckoning, when you will have to make good your accounts and the result will be disastrous.

How to avoid Confirmation Bias.

First, stop telling the search engine what you want it to tell you.  Absolute statements like “BVSAI is rocketing” is going to retrieve only articles about that.  Something more neutral like “BVSAI Stock Analysis” would be better and will yield better search results.

Secondly, whatever you think is going to happen, ask yourself how to phrase the opposite and put that into a search engine.  

Third, ask yourself why you think something is going to happen, and then search for reasons it may not happen.  So, “Risks to BVSAI’s market share” is a good question if you believe BVSAI is going to dominate the vaporware market.

Whenever looking at publicly available information, make note of the source.

The following is an example of people, entities, who might post information. You should always be aware of why they are motivated to share their wisdom.  

  • In an ideal world academics try to be free from any sort of bias, but you still have to check if they are actually academics or does their organization have an agenda.
  • Someone like myself wants you to read my blog or buy my books so I’m going to try to say something interesting.  My motivation is pretty straight forward. 
  • Businesses have their own best interests. If their interests are not yours, watch out.
  • Think tanks, advocacy groups, always have a slant; be aware of what it is before ingesting their media. 
  • Television shows, publications and podcasts want you to watch so they can sell their audiences to advertisers.  You are the product.
  • Politicians want you to vote for them and will say whatever they think will make you cast your ballot in their desired manner.  Do you understand why they want that job or what’s in it for them?
  • Social media posts may be pure fiction and often obfuscate their source.  Be careful, these can be extremely dubious.

If you ask yourself, why is this person, group, business, entity, or unknown person is saying something, you will be better able to give it the weight it deserves.

Final note on Confirmation Bias

It can be disturbing when what we thought to be true, is called into question or disproved.  But, the costs of misleading yourself can be devastating; don’t blame yourself, ask better questions.  Then ask yourself, “who is answering those questions and why would they want you to think that?”  

Remember, in order to be well informed and prosperous:

  • Keep an open mind to contrary arguments,
  • be precise about who and why they are speaking to you,
  • don’t be emotionally attached or over-invest in any one opinion,
  • listen carefully, don’t assume you are right.

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