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Getting Unstuck as an Investor: Eliminating Your Own Confirmation Bias

confirmation bias in investing and political psychology

Through confirmation bias I have unconsciously trained myself to pose like this in pictures

Confirmation bias is a self deceptive trick of the ego which influences a person’s judgment, where the person usually denies all available, pertinent information about reality in order to support an initially held viewpoint. Even if the initially held viewpoint can no longer be supported rationally at the present time.

“It could never happen here, and it could never happened to me.”

For anyone curious about the direction of the United States economy and currency, I they are welcome to take a look at my personal research on long-term US economic prospects found on the homepage of this website.

For now though I want to talk about a phenomenon in psychology and communication as confirmation bias.

Why You Should Eliminate Confirmation Bias from Your Investor Psyche

 

Enron’s Demise

Many people know about the Houston Texas based oil company Enron and how it fell at the turn of the 21st-century. Anyone who has seen the excellent documentary “The Smartest Guys in the Room” will tell you that even as Enron starting to suffer major problems and begin its massive descent, its highest ranking organizational members were still encouraging the purchase of company stock while they were selling their own shares. To their own employees. Not just unwitting members of the general public.

And of course they were doing this to get more capital for their dying company to buy them time so that they could gradually liquidate their shares. And how did it all end? A suicide, a death, and a lot of out-of-work broke people with no job and no retirement.

Before my dad retired he used to work for Texaco-Chevron in downtown Houston and he painted a very vivid picture to me about the day when Enron went completely belly up. He told me that Enron employees for the last five years had usually been the most arrogant a holes on the commuter bus to and from the park-and-ride, but that day when they all lost their jobs, they were anything but arrogant.

Hanging on to a bad trade: We’ve all been there

Often time as investors, and as poker players, we may have a tendency to try to just hang on and ride it out. Things always worked in the past, and it was never really a problem so why would it be a problem moving forward?

Tell that to the people who failed to evacuate the Louisiana Gulf Coast region during a force five hurricane. Tell that to British Petroleum, which for all we know created considerable ecological damage in the Gulf of Mexico when their faulty rigs failed. Tell that to Ben Bernanke, who publicly testified only a year before the housing market started to collapse that he foresaw only continued growth in the short, medium and long term.

Tell that to my college professors who, in their own words, would have to work an extra 10 years instead of retiring, and a big reason is because they failed to diversify their investments, retirement accounts and 401(k)s prior to the stock market crash in late 2008. If they would have held a significant position in gold, they may have actually profited during the housing market collapse and the financial markets took a dive.

It pays to be smart. Life is all about surviving the variance. It is not the strongest nor the fastest that survive, it is those who are most adaptable to change.

Plan ahead my friends!

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