Investors tend to exhibit confirmation bias from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
Investors have a natural tendency to seek out information that confirms their pre-existing beliefs. This means that they pay more attention to information that supports what they already think, while disregarding or downplaying evidence that goes against their views. This tendency, known as confirmation bias, can lead investors to make decisions based on incomplete or biased information. Confirmation bias can be particularly harmful in the world of investing, where decisions can have significant financial consequences. By only seeking out information that supports their beliefs, investors may overlook key data points that could challenge their assumptions and lead to more well-rounded decision-making. This narrow focus can result in missed opportunities or increased risks in investment portfolios. One common way confirmation bias manifests itself is through selective attention. Investors may actively seek out news sources or opinions that align with their own views, while ignoring or dismissing conflicting information. This can create an echo chamber effect, where investors only hear what they want to hear, reinforcing their existing beliefs and potentially leading to poor investment decisions. In addition to selective attention, confirmation bias can also lead investors to engage in selective interpretation of information. Even when presented with the same set of facts, investors may interpret them in a way that confirms their existing beliefs. This can result in a distorted view of reality, where investors only see what they want to see, rather than objectively assessing the full range of information available.- Confirmation bias can cloud investors' judgment and lead to suboptimal decision-making. By being aware of this cognitive bias and actively seeking out diverse perspectives and opinions, investors can counteract the tendency to only focus on information that confirms their preconceived notions. This can lead to more thoughtful and well-informed investment decisions, ultimately improving the overall quality of their portfolios.
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