OPINION | The 7 deadly investment biases, part 2

0:00
play article
Subscribers can listen to this article

This is the second in a seven-part series on the seven deadly biases of investment - and how they could be costing you. Read the first part here.


"Once we have formed a view, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. Confirmation bias suggests that we do not perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. Thus, we may become prisoners of our assumptions."
Shahram Heshmat, Psychology Today, April 23, 2015


Does this sound vaguely familiar? You construct a hypothesis about a stock, property or any investment proposition. 

Doing further research, positive and endorsing evidence, information that supports your narrative is met as confirmation. Information that clashes with the narrative is met with 'they don't really know/understand'.  

The plethora of information we have at our disposal in the age of data makes falling prey to confirmation bias more prevalent. Fake news on social media that confirms a suspicion you might have, is retweeted or liked, which causes it to pop up atop your feed, its validity reinforced. Filter bubbles are designed so that you go further down the confirmatory rabbit hole as your news feed is bombarded with articles confirming what you already believe.

We are unfortunately also prone to believing that although this bias is evident and broadly visible, we are not influenced by it.

Matthew Lieberman and colleagues published an article in the Neuro Leadership Journal in 2014 observing that individuals are poor at identifying and monitoring their own biases. They noted that our brains are wired to avoid friction and endorse fast and efficient information processing.

And if you think you’re too intelligent for confirmation bias, think agian. There is evidence that 'smarter' people are more prone to falling prey to confirmation bias. Why? They have a great ability to construct and rationalise a convincing narrative about their belief.

There are two ways we can approach a decision with the hope of minimising confirmation bias.

The first is to approach the hypothesis with humility. An attribution that is sadly rare in the investment management industry. If you approach a decision with the awareness that you do not know everything, you are already a long way down the road to making better decisions.

The second is to use the red-team blue-team approach. Ask a part of your decision-making group to make the case for an idea that was brought to the table. The other members will then have the opportunity to make the case against the idea. Then, get the two teams to switch positions.

If you are making a decision on your own, actively look for disconfirming evidence on a hypothesis you hold. Finish the article you started reading even though it seems the author does not know, or better yet, 'just does not understand' the current environment. Listen for a few minutes longer to the podcast when you believe the interpretation of the host or guest is 'way-off'.

To better understand the disconfirming evidence advice, consider the below example.

Below is a variation of a popular logic puzzle (if you enjoy them, more can be found here).

hannes

Most people chose card A and 4, which might confirm your view/hypothesis. Unfortunately, this does not tell you much. In Picking the A and 4 card there is no way to invalidate your hypothesis. Flipping the 7, for example, could provide you with valuable disconfirming evidence. 

If there is a vowel on the other side, the hypothesis should be questioned. A consonant on the other side strengthens your hypothesis.

We will never be able to rid ourselves of all biases; we are only human, after all. However, putting certain structures in place can reduce our susceptibility.

*Logic Puzzle Source: Forbes.com

Hannes Viljoen is a Chartered Financial Analyst. Views expressed are his own. 

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
ZAR/USD
15.22
(+0.02)
ZAR/GBP
20.64
(+0.07)
ZAR/EUR
18.39
(-0.12)
ZAR/AUD
11.71
(-0.06)
ZAR/JPY
0.15
(-0.16)
Gold
1837.13
(+1.33)
Silver
25.04
(+2.73)
Platinum
1083.00
(+1.83)
Brent Crude
54.81
(0.00)
Palladium
2379.00
(+0.62)
All Share
63554.98
(+0.01)
Top 40
58437.27
(-0.02)
Financial 15
11907.59
(-0.08)
Industrial 25
84584.90
(+0.92)
Resource 10
63036.59
(-1.28)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
Yes, and I've gotten it.
21% - 658 votes
No, I did not.
51% - 1622 votes
My landlord refused
28% - 879 votes
Vote