Be your own devil's advocate - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Be your own devil's advocate

Mar 23, 2009

In the previous article on 'anchoring bias', we discussed how analysts and investors have the tendency to get influenced by carelessly chosen assumptions. In this article, we shall examine another tendency called 'confirmation bias'. What is confirmation bias?
As Francis Bacon once said, "It is peculiar and perpetual error of the human understanding to be more moved and excited by affirmative than by negatives."

One we have a notion in our head, we tend to selectively look for evidence supporting the notion. As they say, first impressions are the most lasting. Confirmation bias causes no harm if the initial notion or impression is correct. However, if it is wrong, the bias prevents us from realising our error quickly.

Like most biases, it has evolved due to practical realities. Real life data is often ambiguous and one has to pick and choose in search of meaning. In order to deal with the ambiguity, we attach more weight to evidence confirming our initial view than to those conflicting with it.

Examples

  • Shopping: After buying a garment, we will look for the same item in a more expensive store to confirm that our purchase was at a bargain.

  • Pet stocks: If an investor has had a good experience investing in a particular stock in past, he will find it difficult to form an unfavorable opinion even if the underlying conditions have changed.

  • Commodities: When crude oil futures were trading above US$ 100 per barrel, there were small reports of how oil tankers were floating around Iran and the off take of the commodity had slowed down. However, not much attention was paid at a time when some believed crude would touch US$ 200.

Avoiding the confirmation bias in stock picking

  • Admit: The first step in dealing with biases is to admit their presence.

  • Aggressively seek alternate ideas: One should read about various schools of investment thought, carefully examine them, and only then adopt one as their own. This will ensure that initial view itself is carefully chosen. In this case, even if confirmation kicks in, it doesn't cause much damage. As Warren Buffett says, "You need to fill your mind with various competing thoughts and decide which make sense...I remain big on reading everything in sight."

  • Play the devil's advocate: Having formed an initial view, one should systematically look for conflicting evidence. In fact, it is part of the scientific method - one forms a hypothesis and then systematically tries to disprove it. The famous British naturalist, Charles Darwin used to meticulously jot down evidence which went against his theories. Similarly, when it comes to stock picking, one should ask what could go wrong. Then, one should actively keep track of such events.


Equitymaster requests your view! Post a comment on "Be your own devil's advocate". Click here!

  

More Views on News

The Gold and Silver Bull Market is Not Over (Fast Profits Daily)

Sep 29, 2020

The last few days have been nerve-racking for bullion traders. Stay calm. The bull market still has a long way to go.

Earned Short Term Capital Gains on Shares? Here's What You Need to Know While Filing ITR (Outside View)

Sep 29, 2020

PersonalFN explains CBDT's clarification regarding scrip wise disclosure in ITR in case of short term capital gain.

This Smallcap is a Must Have Stock in Your Portfolio (Profit Hunter)

Sep 29, 2020

Investing in this smallcap could open doors of huge, long-lasting wealth.

Why the Market May Rally for a Few Days (Fast Profits Daily)

Sep 28, 2020

Why I think the market can rise for the next few days.

My Top Pick for 2021 is Not a Stock. It is Something Much More Powerful (Profit Hunter)

Sep 28, 2020

My top pick for 2021 is something that has helped me and my subscribers beat the stock market by a factor of 2:1.

More Views on News

Most Popular

Benjamin Graham Deep Value Stocks

The insights from a man who pioneered arguably the most successful form of investing there is.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 29, 2020 03:37 PM

MARKET STATS