- Confirmation bias can be an easy thing to fall prey to and happens often when it comes to investing.
- There are three things to prevent you from succumbing to confirmation bias: take a second look, seek expert advice, and know your risks.
Remember back from 2000 through 2007, it seemed like you couldn’t go wrong buying real estate, say, like in Florida? You’d go down there and find out in one subdivision it’d be this price and it was a lot lower three months earlier and it’s going to go up three months from now. You thought, “Gee, how’s it look in another area?” You went to another area, and the same thing. You check out a third area and the same thing, confirming what you thought: “I’ve got to buy now!”
Well, we know the rest of the story because real estate prices crashed after 2007. But you fell prey to confirmation bias. The definition of confirmation bias is “the tendency to treat new evidence as confirmation of one’s existing beliefs and theories.” And there’s a lot of it around hype, and emotional-type decisions that are related to things like real estate or other investments where it seems to be a no-can-lose scenario.
I’ve got three things to prevent you from falling prey to confirmation bias:
- Take a second look. Really look at that investment for a second time. Get a second opinion from someone else who’s not related to the situation to see what they believe about the investment.
- Seek expert advice. Go out and seek counsel from an expert in that particular area to see what the pros and cons are with the investment and to ensure it fits your particular circumstances.
- Know your risks. Clearly understand all the risks associated with it. For instance, many thought real estate would always go up, never down. Of course, that’s not true. Real estate, like any equity asset, can go up or down. It’s important to understand that risk and other risks out there.
Follow these three preventative measures and you’ll be able to avoid the bad behavioral aspect of confirmation bias. Then you’ll make smart, informed decisions as you go out and select investments in the future.
Until next time, enjoy!