X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
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

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

Why Starting Young To Plan Your Retirement Works! (Outside View)

Mar 18, 2019

Personalfn illustrates the benefit of starting to plan for your retirement when you are young.

Poor Performance Of SIPs Can Cost You Your Financial Goals (Outside View)

Mar 18, 2019

Those who started SIPs about a year ago are perhaps yet to break even. SIPs have generated disappointing returns for many investors over 3 and 5 years as well.

HSBC Large and Mid Cap Equity Fund - Should You Invest? (Outside View)

Mar 18, 2019

Personalfn analysis about the newly launched NFO: HSBC Large and Mid Cap Equity Fund based on its investment objective, asset allocation, investment strategy and the outlook.

Get Ready to Make Big Profits in India's Defense Sector (The 5 Minute Wrapup)

Mar 18, 2019

India's defence sector is suddenly under the spotlight. Can this sector ride along India's long-term growth story?

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.

Are You Ready for the Big Nifty Move in the March Expiry?(Profit Hunter)

Mar 8, 2019

History suggests the Nifty could make a big move in March. Are you prepared to benefit from this opportunity?

Smallcaps Are Rallying and You Need to Make the Most of It Now(Profit Hunter)

Mar 7, 2019

Did you just miss the smallcap rally? Or is there still time to catch up? Read on for answers and more...

The One Sector to Bet on Today as India Grows into a 10 Trillion Dollar Economy(The 5 Minute Wrapup)

Mar 7, 2019

India's defence sector is suddenly under the spotlight. Can this sector ride along India's long-term growth story?

Is it the Right Time to Buy Mid and Small Caps Now?(The 5 Minute Wrapup)

Mar 6, 2019

Mid and Small Caps have underperformed large caps in the past year. Is the tide about to turn?

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Mar 18, 2019 (Close)

MARKET STATS