Cultural Influences on Financial Decisions
February 12, 2025
In the previous article, we understood what preferred shares are and also paid attention to their characteristic features. In this article, we will take the conversation forward by understanding the pros and cons of investing in preferred shares. An analysis of the commonly stated pros and cons helps investors evaluate the use of preferred shares […]
What is Investment ? It is essential for every individual to keep aside some amount of his income for a secure future. The art of assigning some amount of money into something, which would benefit the individual concerned in the near future, is called as investment. Why Investment ? Investment helps an individual to save […]
When an investor thinks of bonds, they often think about the financial agreement between the investors and the borrowers. However, besides being financial instruments, bonds are also legal in nature. Each and every fixed-income security which is in existence has a contract that defines the rights and obligations which various parties have under different circumstances. […]
The real estate market tends to be a highly fragmented market in most parts of the world. Since the product being sold is not homogenous, there is very little information available about the trends in the real estate sector. For many years, participants in the real estate market have had to deal with this uncertainty. […]
In 2017, a top European Union court has ruled that since Uber’s drivers provide transport services to customers, it should be treated as a transport company. This is against Uber’s stance that it is a technology company. There was good reason that Uber wanted to be seen as a technology company. The biggest reason is […]
The vast majority of investors fail to perform well in the stock market because of behavioral and emotional reasons. The presence of financial knowledge or the lack of it does not make a huge difference. Instead, it is the behavioral biases that turn out to be the crucial deciding factor.
Hence, it is imperative for investors to actively search for biases that may be deep-rooted in their thinking philosophy, and they make attempts to weed them out. In this article, we will have a look at how confirmation bias works and how it impacts investment behavior.
Let us start by understanding what confirmation bias really is. Confirmation bias is the tendency of human beings to actively search for information that matches with the preconceived notion that they have. Individuals tend to pay an excessively large amount of attention to the information which confirms their beliefs. At the same time, they tend to discredit any information that does not conform to their belief.
It needs to be understood that the investor is not doing any of this consciously. Instead, the entire process takes place subconsciously. Investors tend to hold a belief which is often not the result of due diligence. The mind of the investor automatically seeks out information that helps confirm the belief while shunning away information that contradicts it. The problem with confirmation bias is that the investor feels as though they have done the required due diligence even though they really haven’t
Human beings are always searching for inner harmony. This means that they want their beliefs to be harmonious. Hence, if any person is holding conflicting beliefs at any given point in time, it becomes their innate nature to choose one belief. Then they start choosing facts that support their beliefs. This is done by them subconsciously in order to avoid cognitive dissonance. Confirmation bias is a deep-rooted evolutionary behaviour that allows human beings to maintain their sanity.
Confirmation bias affects decisions in all walks of life. However, it has a profound effect when it comes to financial behavior. Some of the main distortions caused by confirmation bias have been listed below:
Avoiding confirmation bias can be tricky. However, it is possible. The trick once again is to first realize that there is the possibility that one’s thinking may be biased. Half the battle is one when an investor starts to doubt their thinking and acknowledges the possibility that he/she may be flawed. Some other steps that can be taken are as follows:
The bottom line is that the confirmation bias can cause significant distortions in the thinking of the investor. These distortions can then also lead to serious financial consequences.
Your email address will not be published. Required fields are marked *