Sponsored by:
Do you have a source of information constantly playing in the background? The gym or restaurants often have a “news” channel playing as a distraction. How did they choose it? Is it a trusted source?
When we turn to sources that tell us what we want to believe instead of the sources that tell us what is true, that’s confirmation bias.
It’s easy to fall into this trap when you’re online. Algorithms push agreeable news, headlines, products, and ideas in your direction while limiting alternative viewpoints or information. Confirmation bias thrives because it’s an efficient way for our brains to process information. It promotes self-esteem and reduces stress by eliminating conflict and contradictions. But that means downplaying or ignoring information that disagrees with our current views.
Confirmation bias can be particularly harmful in the investing world. It might lead investors to hold onto preconceived notions about their investments and discount any information that contradicts these ideas. For example, if a client has concentrated their holdings in a specific sector, they might only absorb good news about that sector and ignore any bad news.
This bias can cause investors to gravitate toward news and analysis that align with their optimistic or pessimistic outlook on a particular stock or market trend. As a result, they may ignore or downplay information that contradicts their viewpoint, potentially blinding them to the full spectrum of potential risks and rewards.
The big problem is that one-sided information can lead to decisions made without a complete understanding of the situation, which can limit options and opportunities.
Here are some things you can do to avoid the confirmation bias trap.
- Seek out contrarian views — Actively look for information that challenges your beliefs. This can help you gain a more balanced perspective.
- Maintain good communication with your advisor. Regular discussions can provide valuable insights and help you stay objective.
- Stick to your long-term investing plan — A well-thought-out plan can keep you grounded and less susceptible to short-term biases.
You can make more informed and balanced investment decisions by being aware of confirmation bias and taking steps to counteract it.
1900 Wealth avoids confirmation bias by not recommending its own products. We have no products to sell. We work with you to help you find the financial solutions that suit you best. Please get in touch with one of our advisors and let us start planning for your future at 1900Wealth.com.
About 1900 Wealth Management LLC
1900 Wealth® is a San Antonio-based investment advisory firm focusing on building structured wealth management plans for high-net-worth individuals and families. The firm is wholly owned by Jefferson Bank, which has been part of the San Antonio banking community since 1946.