Is Confirmation Bias Hurting Your Returns?

It is very hard to be objective about a stock when you own shares of the stock and want to make money on your investment. When researching a stock that you already own, it is easy to only read or listen to people that agree with you. This tendency is a common problem and actually has a name: confirmation bias.

What is confirmation bias?
There is a certain degree of innate insecurity in all people, and people typically do not like for personal beliefs to be challenged. Each person’s self-identity is based on the way he or she sees the world. When people only interact with others who share similar viewpoints, it brings about a feeling of security and comfort.

Why does confirmation bias matter?
The problem with confirmation bias is that it allows people to maintain a set of beliefs that are never scrutinized.

Objectively, when an investor buys a stock, he or she should want to know every possible piece of information available about that stock. Unfortunately, many investors only want to hear reassuring information confirming their decision to purchase the stock. In other words, once they buy, they want to hear only good news from that point forward and ignore or dismiss any bad news.

There are certainly many of bloggers, reporters and commenters out there that have biased opinions and are attempting to manipulate other traders. However, just because someone disagrees with your opinion doesn’t automatically make them a “basher” or a “pumper.” Sometimes in the stock market, considering a viewpoint that is different from your own can save you from going down with a sinking ship.

Defend your trades
If investors truly believe a stock is a good investment, they should be able to provide valid counterpoints to all opposing arguments. If reading an opposing opinion makes you lose confidence in your idea, maybe your idea is not a good idea to begin with.

It is easy to seek out others that share your opinion, but remember that every stock you buy has a seller and every stock you sell has a buyer, so there are always two ways to look at a stock. Just like working out a muscle at the gym builds strength, defending a good idea against scrutiny strengthens your belief in that idea and helps you gain confidence in your trade.

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