Picking Cherries

22 Dec 2020
Yet another cognitive bias that can adversely influence our investing is something known as confirmation bias - more colloquially known as "cherry-picking" or "my-side bias".

These names refer to the tendency by which human beings, once we have made a decision of any kind, tend to assertively seek out information that will confirm our decision as a wise one. Without realising it, we emphasise, highlight or favour information that reinforces our existing view or belief while tending to downplay, avoid or even flat out ignore contradictory information.

Consider this mundane example: imagine one is tossing up between buying a Kia Sportage or a Hyundai Tucson and ends up purchasing the former. One will subsequently seek out and emphasise information that confirms the Kia as a better purchase, while ignoring or de-emphasising any information he/she stumbles upon that suggests the Hyundai may be the preferred vehicle. When you think about it, we all fall victim to confirmation bias almost every day in one way or another.

In the world of investing, confirmation bias prevents us from looking objectively at an investment once we have already made it. Once a stock is bought, we tend to look for information that confirms the acquisition as a good one, while ignoring information that may indicate the investment is a poor or questionable one. The problem is, what if things change and what was once a good investment is no longer worth holding? We need to be able to be impartial and agile, able to move in and out of positions swiftly should circumstances dictate that that is the sensible course of action.

So how do we combat this cognitive tendency that this so strong within us all? Quite simply, it is essential, after a decision is made, to consider all information you can get your hands on, whether it confirms your original view or not. In fact, seek out contrary information and give it fair consideration. By recognising this bias, hopefully, you will see when an investment is no longer the right one for you (you will acknowledge fresh developments and not simply ignore them) or when a new investment should be made, even though you have decided against buying a certain stock in the past.

This last part is harder than it sounds but try never to fall in or out of love with a stock; be objective with new information, play devil’s advocate, and reconsider the merits of an investment without looking for information to confirm your current view. Talking to others who have a different perspective can be very helpful in this regard.



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