After Disposition Effect, today I am going to talk about
another very prevalent bias in our behavior: Confirmation Bias. Confirmation
bias is when someone forms an opinion and then will accept only information
that agrees with it discounting or ignoring everything else.
To understand this, we have to take a step back and
understand how belief's work and affect us. Over a period, a limited set of
experiences take root in our brains and give rise to our Core Beliefs. Most of
the time these beliefs govern our behaviour in the real world and protect us
from danger and harm. As a result, we also carry over or extrapolate
these to challenges in the modern world where the dangers are more mental or to
the mind. At times we also get blinded by these beliefs which lead to mistakes that can have serious repercussions.
Let us see some very famous examples of beliefs leading to
confirmation bias and the consequent outcome.
Belief: President Bush believed that Iraq had Weapons of
Mass Destruction. Confirmation Bias led him to see and believe only data which
supported his belief. And we know how it ended. When the US army invaded Iraq,
they found no weapons of mass destruction.
Belief: Donald Trump was a joke and that Hillary Clinton was going to win the primaries and then the US presidential election? Nate Silver,someone who hasnt been wrong for a while now, for example, said Clinton had a 99% chance of winning the Michigan democratic primary. Confirmation Bias led someone as data driven as Nate Silver to ignore what his data and models were telling him and he let his beliefs take over under the excuse that Donald Trump was an out lier as a candidate. Result: Hillary Clinton lost Michigan Primaries to Sanders and also lost Michigan and also the election to Trump. Sui Generis was Silver's excuse
.
Belief: Closer home let us look at a recent event. The belief was Demonetization will result in black money hoarders
not depositing money in the banking system. Hence almost 20-30% of the currency
in circulation will not come back. This was stated by the Attorney General in
the Supreme Court. Now we dont know what were the assumptions or data backing
the decision of the RBI and the Government but its more likely now that they
presented data which supported this claim rather than looking at the data
objectively and then coming to a conclusion. Instead today it is estimated that
95% of the money has come back into the system. Now the jury is still out on the longer term benefits of this exercise but the quick win of a windfall gain for the goverment has not materialised.
Tomorrow we will see precisely that.
Regards
Anish
http://thenudge.ketto.org/anishpteli
If such smart, resouceful and powerful entities and institutions can fall prey to confirmation bias then you can imagine what the average retail investor faces.
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