Definition
Confirmation Bias
Confirmation bias is the habit of seeking out and believing information that supports what you already think, while dismissing evidence that contradicts it.
Once you buy a stock, you start reading only the bullish reports, follow the bulls on social media, and explain away every bad earnings call. This selective filtering keeps you in losing positions and blinds you to risks — a particular danger when emotion and money are involved.
Guarding against it means actively hunting for the bear case before and after you invest, asking 'what would have to be true for me to be wrong?', and giving weight to disconfirming data. Following analysts or commentators who disagree with you, and writing down your thesis so you can later judge it honestly, both help neutralise confirmation bias.
Related terms
- Anchoring BiasAnchoring bias is the tendency to lean too heavily on the first piece of information you see — the 'anchor' — when making a financial decision, even when that number is irrelevant.
- Overconfidence BiasOverconfidence bias is the tendency to overestimate your own knowledge, skill or accuracy, leading to excessive trading and concentrated bets.
- Behavioral FinanceBehavioral finance is the field that studies how psychology and cognitive biases affect the financial decisions of investors and markets, departing from the assumption of perfectly rational actors.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.