Confirmation Bias in Investments

Abstract

Investors exhibit some well documented mistakes, such as the disposition effect and excessive trading. One potential explanation of these phenomena is confirmation bias. People are inclined to be attached to their investment thesis and are unwilling to consider or accept evidence that they are wrong. Thus, they make speculative bets and hold onto them even as they show a downward trend. Confirmation bias may result from people selectively acquiring information that allows them to continue believing what they initially believe. I investigated selective information acquisition among investors with an experiment that gave participants the choice to read an article supporting an investment they previously made or one opposing it. I discovered that investors are significantly more likely to read the article that is supportive of their decision rather than the article that opposed the investment they had chosen. This suggests that investors exhibit selective information seeking, which could be a source of confirmation bias and is thus a plausible explanation for the investor mistakes previously discussed.