Confirmation Bias

Businesswoman looking at design board

The Issue:

Everyone enjoys being right and we each have a natural tendency to interpret, recall and selectively search for details that support our point of view, giving a disproportionate bias to favourable information. This results in overconfidence in decisions based on a skewed viewpoint and even unsubstantiated conclusions.

Take for example, the shares of a company that you’ve held for years. Your Investment Advisor recommends that you sell the shared for particular reasons. You request more information and once you read the reports, you instead focus on several positive comments. This is an example of selectively relying more heavily on information that confirms what we already believe. This can lead to decisions that are unprofitable or can put you at unnecessary risk.

The Solution:

It isn’t easy to remain open minded so if you identify with this bias, you’re in good company. The best way to avoid this error in judgment is firstly to realize that this natural tendency exists. Secondly, you can protect yourself by compiling a list of pros and cons rather than processing everything cognitively. Simply put, write it down. Also, when working with a professional investment advisor, ensure that each decision is being weighed with a variety of sources.

Tags: , ,

Get in touch

CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.

Disclaimer