Confirmation Bias Definition
A Confirmation bias refers to favoritism expressed towards an idea, a belief or ideology. It is a type of bias in which individuals or investors favour information that align with their opinions or perspectives and disregard all contrary information. Confirmation bias also refers to influence of beliefs and desires by pre existing opinions of individuals.
A Little More on What is Confirmation Bias
In psychology, confirmation bias is a situation where an individual ignores ideas and opinions that do not match with theirs. For instance, individuals tend to take an idea or concept as true and useful if it confirms their previous beliefs, all other concepts, opinions and ideas are filtered.
Confirmation bias occurs in diverse ways, for instance, loving an idea or concept to the extent that you wish it were real can create confirmation bias. Psychologically, individuals favor, embrace and acknowledge information in a way that confirms their preexisting beliefs. In business and investment, it is recommended that confirmation bias is avoided, this is because many errors and problems can be created. When an investor only seeks information that favor his existing beliefs and biases, it can result into problems. A businessman or investor that clouds his knowledge and perspectives with confirmation bias will make poor decisions.
One-sided or biased view does not always bring positive results, it denies an individual from seeing other opportunities in the market.
Example of Confirmation Bias
Usually, confirmation bias occurs when an investor is overconfident about a decision or opinion. When people hold on tight to their opinions without giving room for other perspectives or being open to new opportunities, retardation can occur. For instance, markets tend to remain in their positions, whether bullish or bearish due to confirmation bias.
For example, if an investor gets a pre-knowledge about the probability of a company going bankrupt and sells his holdings in the company due to this knowledge which is unconfirmed, this is confirmation bias. A popular confirmation bias is when people hold on to the belief that new products sell faster and make business decisions based on that.
Overcoming Confirmation Bias
Experts and psychologists have made recommendations on how individuals can overcome confirmation bias, two major solutions have been proffered. First, believing that confirmation bias exists and anyone can be a victim is crucial to overcoming this bias. This will help investors change their perspective when assessing different opinions, it is also helpful in helping individuals retain an open mind when making decisions.
Second, individuals, especially investors should stay clear from asking questions tailored towards confirmation bias, such as asking questions to confirm their opinions. Rather, investors should make general findings and gather as much information as possible before making a decision after critical assessment.