Confirmation bias exists everywhere in the markets of today, and is one of the largest contributors towards the current recession we exist in. It is a very common type of self-deceit and overblown optimistic prediction.
Confirmation bias stems from the proximal influence of a certain traderâ€™s greed on their actual logic and beliefs. If a person wishes for a belief to be absolute, they will indeed lie to themselves that it is part of their reality, regardless is such a thought holds no objective standing outside of their warped cognition.
A Disastrous way of Thinking
Let us take the hypothetical example of a trader who happens to have invested in shares belonging to McDonaldâ€™s. The trader is positive that the shares will begin to rise in their values, even if such a process is impossible when one regards the delineated market indicators.
The trader is so stubborn and set in his thinking, that even when these shares begin to depreciate in value, he refuses to let go of them and sell, under the unshakable belief that he will profit in the end of it all.
This is what confirmation bias is – the absolute loyalty to an idea that causes people to be delusional regarding the objective circumstances, the person preferring to overlook or even reject completely any alternative data that would otherwise result in their own fears and doubts coming to the fore.
Traders that are in a state of confirmation bias will only accept information and statistics that reinforce their faulty thinking, only reading up on figures that â€˜confirmâ€™ that their strategies are indeed wholesome and correct. This includes things like historical data, where they will point out how person A employed strategy B with shares in company C and made a massive profit in the end.
Such potentially destructive thinking patterns will continue onwards so long as the trader is under the impression that their schemes are foolproof, and that they are indomitably correct. As you can imagine, such a process can be supremely costly and devastating when their ambitions drag their acumen through a very draining series of losses on the market.
It is not all gloom and doom, however, as there are plenty of ways for the average trader to pull themselves out of such a rut.
Pulling yourself out of Faulty Thinking
There are various steps that a trader stuck in a confirmation bias whirlpool needs to endeavor towards if they wish to get their trading back on a sensible track. The first step is, of course, to acknowledge and admit that you suffer from confirmation bias.
One of the leading techniques available involves externalising yourself from your situation, and scrutinizing yourself from an outsiderâ€™s perspective. Try to empathize with how someone else would view your situation and strategies, or how imagine looking at yourself through a crystal ball.
You will now be able to recover an inkling (at first) of your usual intelligence, and will be able to see just what manner of odds have been stacked against you.