The ancient Greek historian, Thucydides, wrote, “It is a habit of mankind . . . to use sovereign reason to thrust aside what they do not fancy.” The phenomenon to which he speaks manifests itself in all walks of life, from politics to religion and investing. Today, this concept is termed “confirmation bias” and refers to the tendency of people to favor information that confirms their beliefs or hypotheses. Research “suggests physiological explanations . . . that the evolutionary development of the human brain has facilitated the ability to use heuristics which provide good judgments quickly, but which can also lead to systematic biases.”1 As financial market participants, we must acknowledge the presence of this bias in order to improve investment performance and avoid unforeseen risks. To this end, it’s worth considering instances of confirmation bias at the investor, banking, and corporate levels.
Michael Shavel, CFA, is the Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst at AllianceBernstein’s Global Growth and Thematic team.
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1 Sabourian, H. and Sibert, Anne C., Banker Compensation and Confirmation Bias (April 2009), CEPR Discussion Paper No. DP7263