Cognitive Biases Part 4: Confirmation Bias

Our obsession with experts feeds into another behaviour that messes with our investment decisions, which is called Confirmation Bias. As humans we tend associate ourselves with people and ideas that are consistent with our own. We will read articles in newspapers and blogs that we agree with. Conversely we will avoid content and messages which run against our preconceived and formulated biases, notions, and ideologies. Our biases change the way we see and interpret the world around us. It also affects our memories. We are disposed to retain less of what we agree with.

When you bring this into how we should invest, these biases will pull us to strategies and ideologies that we find palatable. If you believe value investing is the best way to invest, you will consume and listen to information that validates that believe system and dial out anything that challenges that belief system like technical analysis or growth/momentum investing strategies.

Social Media: Ground Zero for “Tell Me What I Want to Hear”

An area where Confirmation Bias is blatantly evident is social media. The model was based on the promise of providing you with content that you want to hear and content that you are most likely to agree with.  In the early days of social media was to follow and connect with people who share similar interests, beliefs, and values. Every time you came across someone who was in alignment with your value system, you would “like” and “follow”. You could then create a timeline and observe snapshots of those people and build a repository or community of people who “get” you. These timelines in the early going were unfettered and unfiltered.  That is no longer the case as timelines are now very much filtered based on algorithms that are showing you the “best” and most likely content that will be agreeable to your value system. Social media and specifically Facebook and Twitter has become so advanced that they can literally control your emotions by skewing posts or posting more positive or negative words. The gist is the more you are on social media platforms the more likely you are consuming content that is constraining you from listening to different viewpoints and perspectives which ultimately limits your ability to properly evaluate and make effective investment decisions.

If we bring this back to investing and the example where you are hard core, card carrying value investor. Chances are your twitter feeds will be following other hard core value investors. You might have a few technical analysis investors there for posterity, but chances are you will ignore their posts and read other value investors ideas with the goal of validating or confirming your own valueset. From an investment perspective you are essentially closing your mind to a world of ideas and prospects which will ultimately drag on your returns. There is no one single investment strategy that can works consistently over long periods of time. All strategies go through cycles and understanding other perspectives provides opportunities to lay foundations for future investment opportunities.

Jeff Macke wrote an amazing article highlighting this phenomena and crystalizes it quite succinctly, “Markets are nothing but social mood experiments on a mass scale. (See Shiller on the “fear rally” last weekend). Facebook openly manipulates users’ News Feeds to optimize the amount of content with share potential. That’s not Facebook being evil. They’re giving users what they want. That’s Facebook’s job and why one of the reasons I own the stock.”

"More personally, the self-medicating part of your brain compelling you to click “Dear Kitten” is loathe to watch anything that contradicts your current beliefs. Facebook’s algorithms are designed to make you feel good, not suggest you’re about to get financially ruined."

Macke goes on to comment that we need to get out of this hamster wheel of consuming content that validates our beliefs or in our case our investment decisions, but instead to embrace ideas that challenge our thinking,

“Successful investing isn’t about finding evidence that you’re brilliant. When you buy a stock it’s already safe to assume you understand the bullish case. As Ray Dalio and other money makers know, profitable investing over the long-term requires challenging your existing beliefs in a tangible way."

"In other words, you need to be reminded over and over again exactly how and why your portfolio could implode. The enemy is surprise. Everyone is wrong occasionally but that’s only fatal if you’re too stubborn or ignorant to admit you made a mistake and take the loss.”

So keep tapping into your Twitters and Facebook’s for your investment knowledge base, just make sure you are adding some perspectives from all the meats of our investment cultural stew.