WSJ: What Does Confirmation Bias Mean?

By SIMON CONSTABLE

In an effort to understand why investors do what they do, the term “confirmation
bias” is often trotted out. Most basically, it means that people tend to find evidence, in
the form of data or anecdotes, to support their position and ignore evidence to the
contrary.

That might make sense for politicians arguing with each other, but it can be dangerous
for investors.

“From a behavioral-finance perspective, the mind likes to see what it likes to see, and
so it filters information,” says Steve Wood, chief market strategist at Russell
Investments. “You need to expose that bias to the pressure of data.”

In particular, he says, don’t seek out data that supports your position. Instead, look at
all data and try to objectively assess it. In other words, we all want to prove we’re right.
But doing so could lead us to ignore the facts that suggest we’re wrong.

Mr. Wood uses the example of being predisposed to a certain conclusion when discussing inflation. When he talks with some people who were part of the workforce
in the inflation-ridden 1970s, they are often predisposed to seek out inflation
protection in their portfolios.

But right now, according to most government measures of prices, inflation looks tame
and likely to remain so. Still, those who have confirmation bias toward the idea that
there is already or is going to be inflation might conclude they need assets in their
portfolio to protect against it, says Mr. Wood.

The result: Suboptimal investment choices are made.

See original story here.