The tendency to search for, favour, and recall information that confirms pre-existing beliefs — while dismissing or underweighting evidence that contradicts them.
“What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention.”
— Daniel Kahneman
Deeper Explanation
Confirmation bias is the systematic tendency to interpret information in a way that confirms what we already believe. It operates at every stage of the investment process: which information we seek out (we read analysis that supports our thesis and avoid analysis that challenges it), how we interpret information (ambiguous data is seen as confirming when we are bullish, as worrying when we are bearish), and what we remember (confirming evidence is recalled more readily than disconfirming evidence). The investment cost of confirmation bias is that it makes our beliefs self-reinforcing and our analytical processes circular. When we own a stock, we are motivated to maintain our bullish thesis — so we seek confirming evidence, interpret neutral data positively, and dismiss bearish analysis as insufficiently informed. Over time, our apparent understanding of the investment deepens while our actual openness to contradicting evidence narrows. We become more confident precisely as we become more biased. Confirmation bias is especially dangerous in the research process. An investor who decides to buy a stock and then does research to support the decision will almost certainly find what they are looking for — the stock market generates enormous volumes of information, and confirmation bias will filter in the supporting evidence while filtering out the contradicting evidence. The corrective is pre-mortem analysis: before committing to a position, deliberately write the case for why the investment will fail. What would have to be true for the thesis to be completely wrong? What are the three best arguments against owning this stock? Forcing the adversarial analysis before conviction is established prevents confirmation bias from preventing it later.
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