Confirmation bias' a tendency only to pay attention to data and opinions that confirm our pre-existing beliefs is just one of our many psychological handicaps as investors. If we own a stock, we only like to hear bullish opinions. But the less well-known flip side of confirmation bias motivated reasoning' is just as dangerous, says RP Seawright, chief executive of Madison Securities. In short, we tend to "scrutinise ideas more critically when we disagree with them, than when we agree".
A classic 1964 study on smoking and cancer makes this clear. Smokers and non-smokers were asked to evaluate the conclusion of the then-Surgeon General, who had linked smoking to cancer. Non-smokers tended to agree with him, whereas smokers tended not to, quoting a range of anecdotal evidence (such as "lots of things are hazardous") in their defence.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?Premiums for whole of life insurance can run to £5,000 a month to cover a £300,000 inheritance tax bill, with policies costing more the older you take them out.
-
MPs warn over Lifetime ISAs which could leave savers out of pocketThe Treasury Committee has highlighted confusion around the Lifetime ISA withdrawal charge, which risks consumers losing “a significant part of their savings”
