Investing and The Danger of Confirmation Bias

Confirmation Bias

Confirmation bias is a systematic pattern of thought that humans develop to form their own construction of social reality using information that they handpick to form their own narratives.

Confirmation bias can be described as “the tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs. This biased approach to decision making is largely unintentional and often results in ignoring inconsistent information. Existing beliefs can include one’s expectations in a given situation and predictions about a particular outcome. People are especially likely to process information to support their own beliefs when the issue is highly important or self-relevant.”

In politics this is known as creating an echochamber whereby you only surround yourself with people who are of the same opinion and beliefs as you. The reason for this is that humans are hardwired to require constant feedback in the form of positive reinforcement.

If your beliefs are wavering and you start to ask yourself questions like “have I made the right decision” or “is this really what I believe to be true?”, you seek out others who are like minded on the same subject matter to reaffirm you have made the correct decisions and you trust your own judgement.

This psychological tendency can be seen in areas such as religion, politics or any situation where an individual has to pick one side or entity over another. An area where this is also particularly prevalent is in trading and investing.

Investing

Although my personal background and experiences are with investing in cryptocurrencies, the same principles can be seen with stocks, bonds and other financial instruments.

You’ve spent hours, days and maybe even weeks researching and analysing a project/company that you feel has no flaws and is only destined for the top and to become the next big thing. Additionally you have also been scaling in your position on any dips and dollar cost averaging down.

You join the community chats, take part in AMA’s with the CEO and start tweeting, posting and sharing your views on your beloved coin. The longer you spend with other holders, who are also of the same mindset as you, the more you solidify your belief in your decision to invest your hard earned money into this project.

You even begin to daydream at work. What will I do when my project does do a 10x and I finally reach financial independence? I think I’ll buy that new car I’ve always wanted or maybe treat myself to that new set of golf clubs.

Fear. Uncertainty. Doubt.

Then FUD occurs. FUD, for the initiated, is a term often used in the cryptocurrency space that stands for “Fear, Uncertainty and Doubt”. This basically means that a person, group, news article etc.. is speaking negatively about your project. Your project! The one you’ve spent the last three months discussing, sharing and speaking with others about how much the shares or tokens can be worth one day. There’s no way you could have missed anything as you spent months researching this! This is unacceptable.

But there is reason to feel this way. The crypto space is notorious for scams and groups looking to make a quick buck at the expense of gullible and naive investors. And projects have exit scammed and gone to zero, many of them.

However the harsh reality of the truth is that most of the time this “FUD” are actually valid questions that haven’t been answered properly by the project or core team members. Maybe the tokenomics don’t make sense. Maybe the marketing strategy isn’t the correct one to be utilising. All highly plausible and legitimate questions immediately disregarded as negative comments.

This is the power of the echo chamber that has been created across social media and in your mind. Confirmation bias is an extremely powerful psychological tool. It’s even possible to forget some bad news or event that happened to the project if it doesn’t align with the overall mental image that you have created.

Having this very narrow way of thinking can be dangerous as an investor as it means it doesn’t allow you to consider all possibilities and eventualities.

You may see negative comments as “FUD” but is this true? Image via CRN Australia

So how can you combat confirmation bias and allow yourself to maintain an open mind with your investments?

This is easier said than done as it requires you to happily and openly admit you are wrong and that your belief or view is wrong — even when you’ve spent time, effort and money convincing yourself otherwise. However, there are methods you can apply to ensure you don’t fall into this trap.

Effectively DYOR

Do Your Own Research is a mantra in cryptocurrency that many adhere to however this is a very vague term. How do you know how to properly DYOR? Kristen Colwell, a writer at The Daily Chain, believes that in order to effectively DYOR you need to start with an open mind, get to know what you don’t know and finally, be able to think critically. You can read her article on how to DYOR here.

Take Responsibility

Take Responsibility for your decisions whether it be trading or investing. No one is forcing you to invest and your research is your own responsibility. Therefore you must also be responsible for the fact that you might have missed something or could be wrong. Crypto Otsukimi has written a great article on this which you can find here.

Listen To All Sides

Rather than immediately disregarding what you deem as a negative news article or opinion piece about your investment, take time to read the whole article and consider the points being made and put forward. Are they actually valid? Do they make sense? Try and see this from their point of view and absorb this information. Come back a bit later and attempt to reconsider this view point.

I hope you have found some value in this article and hopefully now have the knowledge to avoid falling into some of these investing pitfalls.

Alex Libertas

Founder and CEO of The Daily Chain