Behavioral Finance and Your Portfolio

5Belief Perseverance Bias #3: Confirmation Bias

It is the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives than by negatives.

—Francis Bacon

Bias Description

Bias Name: Confirmation Bias

Bias Type: Cognitive

Sub Type: Belief Perseverance

General Description

Confirmation bias refers to a type of selective perception that emphasizes ideas that confirm our beliefs, while devaluing whatever contradicts our beliefs. For example, it is quite typical for someone to decide, after having bought a much-desired item such as a television, to look for the same television at a store that is known to have higher prices in order to confirm that he or she made a good purchase decision. This behavior, going back to cognitive dissonance in the last chapter, is caused by our attempt to resolve the post-decisional dissonance between the decision made and the possibility of being wrong.

To describe this phenomenon another way, we might say that confirmation bias refers to our all-too-natural ability to convince ourselves of whatever it is that we want to believe. We attach undue emphasis to events that corroborate the outcomes we desire and downplay whatever contrary evidence arises. Political television channels are a concrete example. Certain channels promote republican ideals and others promote democratic ideas. Rarely do viewers want to “see the other side” point of view by watching the “other party's” channel. We are inclined to “hear ...