Day 10: Understanding Greed and Fear: Confirmation Bias

It is going to be a short blog today.

Confirmation Bias is one of the most lethal biases and also very hard to detect. It has a overlap with Conviction. Its a slippery slope.

And hence one of the best ways to avoid it is to 

• Seek out data contrary to your belief
• Try to disprove your own theory
• Talk to someone who is not invested in the outcome of your idea

However being aware of this is not the only way to overcome confirmation bias. Before making a buy decision it is best to put down on paper or make a note of why you are buying the stock. It need not be a very detailed note but even if you make a half pager covering the salient points it should be enough. A very importannt component of your note should be the scenario in which your investment thesis is proven wrong and what action would you take in that scenario. I will try and provide a format in the coming days. 

Going back to the Day 6 blog, profits take care of themselves, losses seldom do.

And hence when a stock goes in to a loss , that is when we start looking for data points to justify our decision to keep holding on to our position. It hurts our ego to book a loss and there is also FOMO (Fear of Missing Out) incase the stock starts going up after we sell it. And some stocks will. 

Here are two intersesting articles to read on confirmation bias.

• How Investors Suffer From Confirmation Bias
• Why We Think We’re Better Investors Than We Are

Wishing you all a very happy Republic Day.

Regards

Anish