If you’re a fan of David Letterman’s “Stupid Pet Tricks” let me tell you, none of men’s best friends have anything over our own ability to trick ourselves, especially when it comes to losing money in the market. In our last post, we talked about a trick our brains play on us in the form of “recency bias.” Today, we’ll talk about “I thought so,” syndrome, or what is known in behavioral psychology circles as confirmation bias.
Confirmation bias is our tendency to put on blinders when analyzing our own decisions. When supporting evidence comes along, we’re less likely to question it and more likely to remember it. In contrast, when conflicting evidence arises, we’re more likely to find fault with it, gloss over it or forget it even existed. After all, most of us enjoy being right … no matter how often our spouse reminds us otherwise.
I’m no more immune to confirmation bias than the next guy. For example, when I left my job at Dell several years ago, I realized I could finally buy an Apple. But, darn the luck, we already had a perfectly good PC at home. Wouldn’t you know it, after an aggressive campaign against my better senses, I was able to begin noticing how slow my PC seemed to have become (not true), how much I’d been wishing I could improve on its digital photo management (not really), and how many reviews were extolling Apple’s superiority (in Apple’s own ads). After convincing myself that the only logical choice was to switch to an Apple, I remember realizing shortly thereafter that I’d talked myself into buying a new computer I didn’t really need.
So I ended up with two computers, which is not such a bad fate for a techie at heart. As described by Bloomberg View columnist Barry Ritholtz, confirmation bias can have far more serious repercussions for investors who try to predict market movements. “Decide that a correction or crash is coming, and you will begin to see more and more evidence confirming that expectation,” says Ritholtz. Or, for bulls, “Believe that the rally or economic expansion will continue and soon after, everything you see will support that thesis.”
Investors who are in it for the long haul don’t have much business trying to predict near-term markets to begin with. You’re better off ignoring the never-ending, confirming financial media hype, sticking with your long-term portfolio, and spending your extra free time teaching your cat to sing, “I Did It My Way.”
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