Confirmation Bias: Why We Only Hear What We Want To Hear About Our Investments

Our mind plays an important role in the way we invest our money. A common mental habit that may affect our investment journey is confirmation bias. Confirmation bias in investing means we pay more attention to information that agrees with what we already believe and ignore or downplay anything that goes against it. This bias can slowly shape our choices, often without us realising it.

Table of contents

• Understanding confirmation bias
• How it impacts investment research and decisions
• Real-world examples from market trends
• Strategies to challenge one’s own views
• Techniques for balanced information gathering

Understanding confirmation bias

The psychology of confirmation bias works to protect our existing beliefs. Let’s say you believe that a particular stock is promising. Once that belief forms, your mind starts looking for information that supports it. Articles or reports that talk positively about that company may seem more convincing. At the same time, you may dismiss negative views as unimportant or incorrect.

In investing, this bias can show up as:

• Reading only positive stock reports and ignoring the cautious ones.
• Talking mainly to friends or advisers who agree with you.
• Searching for reasons to keep holding onto a stock, even when new facts may suggest otherwise.

This type of investor bias can limit what we see and hear.

Also Read: 5 Significances Of Behavioural Biases In Decision Making

How it impacts investment research and decisions

The purpose of stock research is to collect facts, compare them, and then make a balanced decision. But stock research bias can interfere in the following ways:

• Unbalanced information: We might read five optimistic reports and feel confident, while ignoring the one cautious report that raises genuine risks.
• False confidence: Believing only the supporting evidence can give us a false sense of certainty.
• Delayed decisions: Sometimes we hold on to shares longer than necessary because we keep looking for selective investing signals that reassure us, instead of facing uncomfortable truths.

Over time, this may lead to various types of investment mistakes.

Real-world examples from market trends

Confirmation bias can be seen at play in the market:

• Bull market periods: When share prices are rising, many investors mainly focus on stories of growth and success. Warnings about valuations being too high often get ignored.
• Popular sectors: In phases when technology or real estate stocks look favourable, people often overlook concerns about debt or slowing demand. They highlight success stories and avoid negative research.
• Personal favourites: Some investors form an attachment to a brand they use in daily life. They follow all the positive news about it, while ignoring any warnings about competition or falling margins.

Strategies to challenge one’s own views

Being aware of our limitations is the first step towards reducing the impact of a bias. You can also try the following to deal with confirmation bias investing:

• Ask what could go wrong: For every stock idea, write down not just the positives, but also at least some possible negatives.
• Play the other side: Before buying or holding a stock, imagine you had to argue against it. This forces you to look for gaps.
• Set rules: Fix a profit or loss limit in advance. This may make it harder for bias to cloud your judgement later.
• Listen to diverse voices: Read research from different analysts, including the ones you usually disagree with.

Techniques for balanced information gathering

Balanced information can be a defence against investor bias. Some useful habits are:

• Follow both sides of the story: If one report says “buy”, look for another that says “hold” or “sell”. Compare the reasons.
• Mix sources: Use company filings, independent research, and cautious media articles, rather than depending on one favourite source.
• Note down assumptions: While doing research, write your main reasons for buying. Later, revisit and check if those reasons still hold true.
• Review regularly: Markets change. A healthy review of your investments every few months can help correct old biases.

These techniques may not remove the bias fully, but they can reduce its power.

Also Read: Availability Bias: Why Recent Market Crashes May Feel Bigger

In a nutshell

• Confirmation bias in investing makes us look for information that fits our existing views and avoid the rest.
• Stock research bias can create false confidence and delay timely decisions.
• Real market examples show how popular trends or personal favourites often reinforce selective investing habits.
• Simple strategies like asking tough questions and listening to opposing views can help avoid investment mistakes.
• Building a habit of balanced information gathering reduces the risk of letting investor bias guide our choices.

When it comes to investing, it’s may not be possible to remove doubt completely and even if you do, investment outcomes are never guaranteed. However, it’s important to see both sides of the picture before acting. When we are mindful of how our mind filters information, we can make more balanced decisions.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe , which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.

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