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Friday, August 3, 2012

The Power of Confirmation Bias

A resulting impact from anchoring and overconfidence is an additional form of bias referred to as confirmation bias. This bias puts us at risk in the way we perceive information. We continually extrapolate our own beliefs unconsciously and treat information that supports what we believe or want to believe more favorably.

During the decision making process for financial decisions we will refer to information that supports our decision more favorably. We rarely give the obvious negative much consideration. This is due to confirmation bias.

Sales predators are well aware of how individual biases will impact an individual’s decision making process. Surely you have sat through many sales presentations and have not picked up on the unconscious (subliminal) messages. These messages go right to you core belief system and trigger your confirmation bias. You unconsciously are seeking information that supports your beliefs and desires. Unfortunately common sense often is over ridden in this process.

For example you may have a favorite industrial sector you has been very good to you over a period of time. Let’s say energy for example. You will be much more inclined to believe information that supports you positive experiences in this sector and disregard any contrary information. In essence you will continually discount any negative information that could well make a difference in your decision making process.

Hindsight also plays a predominant factor in a confirmation bias. This creates a tendency to re-valuate our past behavior surrounding the decision after we have full awareness of the outcome. Our judgment of a previous decision is tainted by a bias formed to accommodate the new information. In a stock investment once we know the outcome of the stock’s performance we adjust our reasoning for purchasing in the first place. When updating our rationalization in this manner prohibits us from viewing past decisions as objectively as we need to.

The focus effort required here is to once again journal your experiences as they pertain to your decision making process. In order to recognize your internal biases you must have data to review. Without this data you will continue to groove ruts in your decision making process. We become creatures of habits in our decisions. By having a record of the thought process and emotions involved in any decision you will be able to review results with clarity and full transparency. By treating all information with full objectivity you will not fall victim to confirmation bias in your decisions.

Next time we will cover the disastrous impact of procrastination.