What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact

- Warren Buffet

 

In our everyday life, we are impacted by a wide range of cognitive biases. One of the prevalent biases in the wealth management industry in particular is confirmation bias.

Confirmation bias is the tendency to seek out information that supports or confirms existing beliefs and ignore or explain away information that may contradict such pre-existing notions. It is so powerful that, even when there is concrete evidence demonstrating that our beliefs may not be entirely correct, and even when continuing to hold on to those beliefs costs us money, we insist on holding on to these now challenged or undermined conclusions.

 

When investing in businesses, investors often review research reports or online commentary prior to initiating their investments. More often than not, research reports and online commentary will be selected based on titles that confirm or reaffirm their existing beliefs. This presents long-term problems for clients trying to compound wealth. Challenging or contradictory commentary will likely not be considered or read in advance of implementing investment decisions.

Consider this: before any business is bought or sold, clients should remember that for each transaction, there is a buyer and there is a seller. The seller holds a completely opposite view point from the buyer of that particular business. It is not possible for both to be correct. It is likely that each buyer and seller was acting using a degree of confirmation bias to confirm the pre-existing notion that each party held before deciding to make the trade.

To overcome confirmation bias when investing in business, always ask why you might be wrong. Doing so will force you to consider the opposing position and at the very least, allow you to reconsider and challenge your initial belief. 

 

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