Confirmation bias - Why believing we're right can be completely wrong

Thursday, Jun 09 2016 by
26
Confirmation bias  Why believing were right can be completely wrong

Here’s a quick test...

Let’s say I offer you this sequence of numbers - 2-4-6 - and ask you to figure out the rule that I used to create it. All you need to do is suggest some more number sequences to see if they fit my rule. I’ll tell you if they do or they don’t.

What might spring to mind - and studies show that it often does - is an obvious answer like 8-10-12. That does fit the rule, but what’s the rule? It seems a sure thing that the rule is something like adding 2 each time, but it isn’t.

You might now be tempted to make various other guesses at upward sequences of numbers trying to figure out what this damn rule actually is.

A much less obvious answer would be something like 5-3-1. It’s almost inevitable that this sequence would never work and so it’s utterly pointless suggesting it. Indeed, it doesn’t fit the rule - but that’s a big clue to the answer.

My rule is is that the sequence is just made up of ascending numbers, whether it’s 1-2-3, 2-4-6 or 57-65-133 - any upward sequence will do.

This test was created in the 1960s by a British cognitive psychologist called Peter Cathcart Wason. He found that the subjects of the 2-4-6 test often come up with more specific answers than they need to. Moreover, in trying to work out the rule, they usually offer guesses that fit what they already assume the answer is. This and other tests supported what Wason called Confirmation bias.

Falling in love

Confirmation bias is the tendency for individuals to look for and interpret new information in a way that confirms what they already think or believe. It weaves its way into many areas of human activity, from how we interpret online reviews to the ways in which doctors make a diagnosis. But one particularly worrying aspect of this behaviour is how it affects stock market investors. In simple terms, we’re at perpetual risk of falling in love with stocks and refusing to have a bad word said about them!

Confirmation bias generally rears its head after an investor has made an investment decision. That’s the view of Michael Mauboussin, the managing director and head of Global Financial Strategies at Credit Suisse and co-author…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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4 Comments on this Article show/hide all

PJ0077 10th Jun '16 1 of 4
1

"A man sees what he wants to see, And disregards the rest".
Paul Simon, The Boxer.

Great article, Ben.

Confirmation Bias destroys objectivity, kills one's willingness to gather information & leads to delusion.

In short, it may be the single most significant differentiating factor between success & falure as an investor.

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EvenStephen 12th Jun '16 2 of 4

Unless you are really just suffering from confirmation bias. This article is really about cheese.

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tournesol 12th Jun '16 3 of 4
3

The example cited here - what's the rule underlying the 2-4-6 sequence? - seems to me to be a very poor example indeed

In the discussion the rule is revealed to be simply that each number is higher than the one before - so the numbers 11 - 1354 - 200001123 might also be outcomes of applying the same rule.

The commentary says that people who incorrectly infer that the rule is to add 2 to the previous number are displaying cognitive bias.

BUT BUT BUT the logic of that assertion is fallacious.

Anyone who has any mathematical background is well aware that there will generally be several alternative algorithms which yield the same values over a small range. eg 2,3,5 could be terms of the sequence (n+2) or could be adjacent primes. It is impossible to be sure which rule applies unless further data points are provided.

When confronted by situations where there are multiple different rules that might underlie the data, what comes into play is our understanding of probability. We instinctively discard low probability explanations in favour of higher probability explanations.

So in effect we ask ourselves if the rule is that each number is higher than its predecessor, what are the chances that we end up with 2-4-6?

The answer is vanishingly small - it's effectively 1 divided by infinity. That's why we do not bother to consider it.

I have no problem with the concept being expressed here - the unconscious biases we all have. But I think you need a better example.

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PhilH 12th Jun '16 4 of 4

In reply to tournesol, post #3

Poor price momentum means better value rather than bad news coming?

Professional Services: Sunflower Counselling
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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »

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