Confirmation Bias: Why We Only See What We Want to See - Behavioral Finance Series

The Market Didn’t Change—Your Interpretation Did

Imagine this situation.

You believe a particular stock—say a fast-growing technology company—is a great long-term investment. You’ve researched the business, you like the product, the management sounds confident, and the stock price has been rising.

One morning, two news articles appear:

1. Article A: “Company X Beats Revenue Expectations for the Third Straight Quarter”
2. Article B: “Margins Under Pressure as Competition Intensifies”

If you already like the stock, Article A feels important and reassuring. You read it carefully. You might even share it. Article B feels less relevant—something to skim or dismiss as short-term noise.

Now reverse the situation. Suppose you already dislike the company or recently sold the stock. Suddenly, Article B feels insightful and “honest,” while Article A feels exaggerated.

Nothing about the company changed.

The information did not change.

Only your interpretation changed.

This is confirmation bias—and it quietly shapes almost every financial decision we make.

Core Theory: What Is Confirmation Bias?

Confirmation bias is the tendency to:

1. Seek information that supports our existing beliefs
2. Interpret ambiguous evidence in ways that confirm those beliefs
3. Ignore, discount, or explain away information that contradicts them

It happens automatically and often without awareness.

System 1 vs System 2

Confirmation bias is driven primarily by System 1 thinking:

1. Fast
2. Intuitive
3. Emotionally guided

System 2 thinking—slow, deliberate, analytical—can challenge bias, but it requires effort. Most of the time, the brain prefers comfort and coherence over accuracy.

After forming a belief, whether about a stock, the market, or our own investing skills, we start seeing new information mainly in ways that support it.

Motivated Reasoning: The Engine Behind Confirmation Bias

At the heart of confirmation bias lies motivated reasoning.

Motivated reasoning means we are motivated to protect:

1. Our ego (“I make smart decisions”)
2. Our past choices (“I already invested money here”)
3. Our worldview (“Markets always recover”)

When new information threatens these, the brain looks for ways to defend the belief rather than question it.

This is not deliberate dishonesty.

It is self-protection.

Cognitive Dissonance: Why Contradictions Feel Uncomfortable

Cognitive dissonance is the mental discomfort that arises when our self-image as a rational investor clashes with the possibility that a decision we made might be wrong.

That tension feels unpleasant.

Confirmation bias reduces this discomfort by:

1. Ignoring opposing evidence
2. Reinterpreting facts
3. Seeking reassuring opinions

The mind regains comfort—but loses objectivity.

Belief Perseverance: Why Wrong Ideas Persist

A related concept is belief perseverance—the tendency for beliefs to persist even after the evidence supporting them has been discredited.

For example:

1. An investor believes a stock is undervalued due to an old growth forecast
2. Later, that forecast is proven wrong
3. Yet the investor still “feels” the stock is undervalued

This explains why changing someone’s investment view is so difficult—even when facts change.

Financial Consequences: Why Confirmation Bias Is Costly

Confirmation bias has real, measurable effects on investment outcomes.

1. Holding Losing Positions Too Long

When an investment thesis weakens, confirmation bias encourages investors to:

1. Search for bullish opinions
2. Focus on supportive analysts
3. Blame poor performance on temporary factors

Combined with loss aversion, this leads to holding losing investments far longer than rational analysis would justify.

2. Excessive Confidence and Concentration

Once investors commit to a narrative, every supporting data point feels validating. Confidence grows—even if the evidence is weak.

This leads to:

1. Concentrated portfolios
2. Under-diversification
3. Fragile outcomes

3. Distorted Risk Perception

If you believe an asset is safe:

1. Downside risks feel unlikely
2. Negative scenarios feel exaggerated
3. Correlations during crises are ignored

This is why risk often becomes obvious only in hindsight.

4. Market Bubbles and Crashes

At a collective level, confirmation bias fuels bubbles.

1. During the dot-com boom, profitability concerns were ignored
2. During the housing boom, rising prices were treated as proof of safety

Dissenting voices existed—but they were dismissed.

5. Echo Chambers and Social Media Amplification

Today, confirmation bias is digitally amplified.

Algorithms show us content similar to what we already engage with:

1. Bullish tweets about stocks we own
2. Optimistic videos that reinforce our views

Over time, we enter financial echo chambers.

It feels like:

1. “Everyone agrees with me”
2. “The evidence is overwhelming”

In reality, we are seeing a filtered version of the truth.

Expert vs Novice Behavior: What Separates Them

Experts are not immune to confirmation bias.

The difference is process, not intelligence.

How Novices Behave

1. Form strong opinions quickly
2. Seek validating information
3. Rarely document reasoning
4. Judge success by short-term outcomes

How Experts Behave

1. Treat beliefs as hypotheses
2. Actively seek opposing views
3. Separate decision quality from outcomes
4. Build systems to challenge intuition

Accountability: A Powerful Debiasing Tool

Research shows that accountability reduces bias.

Professionals must:

1. Explain decisions to committees
2. Defend reasoning to clients
3. Face skeptical colleagues

This forces deeper thinking.

Novices often answer to no one—allowing bias to grow unchecked.

Advanced Note: Bayesian Updating (Simple Version)

Expert thinking aims to follow Bayesian reasoning:

1. Start with a belief
2. Update it as new evidence arrives
3. Adjust confidence gradually

Confirmation bias is the failure to update—especially when evidence contradicts us.

Practical Mitigation Strategies

You cannot eliminate confirmation bias—but you can manage it.

1. Write a Pre-Decision Thesis

Document:

1. Why you believe this investment will work
2. What evidence would disprove it
3. What would trigger reassessment

2. Seek Disconfirming Evidence First

Ask:

“What would a skeptic say?”

Read the bearish case before the bullish one.

3. Use Decision Journals

Track:

1. Your reasoning
2. Your confidence level
3. The information used

Review later to evaluate process, not outcomes.

4. Slow Down Conviction

Avoid reacting immediately to news.

Let time weaken emotional responses.

5. Diversify Information Sources

Deliberately follow credible voices you disagree with.

Discomfort often signals learning.

Nuance & Debate: Is Confirmation Bias Always Bad?

Not entirely.

The Efficiency Argument

In stable environments, relying on past beliefs is efficient.

The problem is that markets are non-stationary.

They change. Rules evolve.

What worked yesterday may fail tomorrow.

Conviction vs Bias

Strong conviction is not the enemy.

The red flag is when:

Conviction increases as process quality decreases.

Healthy conviction:

1. Is evidence-based
2. Welcomes challenge
3. Evolves with facts

Bias resists reality.

Clear Takeaway: Certainty Is the Hidden Risk

Confirmation bias feels like clarity.

It feels like confidence.

It feels like being right.

But investing is not about being right—it is about adapting.

The best investors do not ask,

“How can I prove I’m right?”

They ask,

“What would make me change my mind?”

That question is the beginning of discipline.