Is Confirmation Bias Hurting Your Returns?

It is very hard to be objective about a stock when an investor owns shares of that stock and wants to make money on his or her investment. When researching a favorite stock, it's easy to only read or listen to people who share a similar bullish opinion.

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.

Related Link: 3 Ways You're Making Trading Much Harder Than It Needs To Be

Confirmation bias occurs when people only interact with others who share similar viewpoints in order to maintain a feeling of security and comfort.

Why Does It 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 bloggers and reporters out there that have their own opinions, so it's easy for readers to find a view that fits their own. However, sometimes in the stock market, considering an angle that is different can save investors 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 causes one to lose confidence in his or her idea, maybe it's worth it to reconsider that idea.

It is easy to seek out others that share a similar opinion, but remember this: Every stock bought has a seller, and every stock sold has a buyer.

Just like working out a muscle at the gym builds strength, defending a good idea against scrutiny strengthens the belief in that idea and helps investors gain confidence in a trade.

Image credit: Public Domain