What is confirmation bias in investing?

Once we like a share, we tend to notice good news about it and skip the bad news. This habit is called confirmation bias. This page explains what it is, how it affects investors and how to keep it in check.

Quick answer

Confirmation bias is the habit of searching for, noticing and remembering information that supports what you already believe, while ignoring facts that go against it. In investing, it can make you hold on to a view about a share or the market even when new evidence suggests you are wrong.

Key takeaways

• It means favouring facts that agree with you.
• It makes people ignore warning signs.
• Social media feeds can make it stronger.
• It often grows with overconfidence.
• Seeking the opposite view is a simple way to reduce it.

What is confirmation bias?

It is a common thinking error. When you already hold a belief, your mind looks for facts that support it and gives less weight to facts that do not. You may not even notice you are doing it.

Psychologists have studied this for decades. It affects many areas of life, from politics to health, and money decisions are no exception.

How confirmation bias shows up in investing

Suppose you have bought a share and believe it will do well. You read every positive article and analyst comment about it. When a negative report comes out, you dismiss it as wrong or biased.

You may also join online groups where everyone shares your view. This creates an echo chamber, where the same opinion keeps getting repeated and the opposing case is rarely heard.

Why confirmation bias is risky

The main risk is missing warning signs. Rising debt, falling margins or governance issues may be in plain sight, but the investor does not give them proper weight.

It also feeds overconfidence bias. If you only see facts that agree with you, you may become more certain than the evidence supports, and you may take bigger positions than you should.

How to reduce confirmation bias

Make a habit of looking for the opposite case. Before you buy, write down three reasons the investment might not work. Read reports that disagree with your view, and ask what would prove you wrong.

Set clear rules in advance, such as a stop loss or a review date. Rules decided before you buy are harder for bias to bend later. Keeping a trading journal also helps you spot when you ignored facts.

The key point to remember

Confirmation bias is part of human nature, and it is one of the biases studied in behavioral finance. You cannot remove it fully, but you can reduce its effect by actively seeking the other side of the story.

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