Confirmation bias

You can explain confirmation bias, spot it in your own research and use a simple counter-check before a trade.

Everything seems to agree

You start to like a share. Suddenly every headline seems to support you, every chart looks promising, and every post you read agrees.

That is rarely because the evidence has changed. It is because your attention has. Psychologists call this one of the most widespread errors in human thinking, and it affects beginners and professionals alike. It is especially costly in markets, where the evidence is mixed almost all the time.

A loop that feeds itself

Confirmation bias is the tendency to seek out, interpret and remember evidence in ways that fit what you already believe. In a widely cited review, psychologist Raymond Nickerson describes it in many forms: in science, in law, in medicine and in everyday life.

It works like a loop:

A view forms. Maybe from a chart, a news story or a tip.
You search for support. You open the sources that tend to agree with you and type questions that assume you are right.
You find what fits. And you give less weight to what does not fit, or find reasons to dismiss it.
The view feels stronger. Not because it is better supported, but because you looked mostly at one side.

In trading, the loop is easy to feed:

Social media shows you more of what you click on. Groups and forums often form around one opinion about an asset.
Charts allow many readings. With enough indicators and timeframes, you can find a signal for almost any view.
Money adds pressure. Once you hold a position, evidence against it is not just inconvenient, it is painful, so it is easier to ignore.

The SEC also warns that social media can create a false impression of consensus, making it look as if many people agree when this is not the case.

Knowing about the bias does not switch it off. What helps are routines that force you to look at the other side before you decide.

Ten for, two against

A fictional trader expects a share to rise after strong product reviews.

The trader reads twelve posts about the company. Ten are enthusiastic. Two point out that sales fell in the last two quarters.
The trader remembers the ten and calls the two "the usual pessimists".
On the chart, the trader focuses on the indicator that shows strength and skips the one that shows weakness.

The next quarterly report confirms falling sales, and the price drops 12% in a day. The information was available in advance. It was simply filtered out. A short list of reasons against the trade, written before buying, would have put the falling sales on the page.

Common mistakes

Only asking people who agree. A friend in the same trade is not an independent check.
Searching for "why X will rise". The question already decides the answer. Search for the risks too.
Adding indicators until one agrees. More tools do not mean more evidence.
Treating a loud group as proof. Popularity says little about whether a view is right.
Reading new facts only as support. Ask how the same fact would look if your view were wrong.

The takeaway

Once you hold a view, you look for proof and overlook the rest. Search for the opposite on purpose.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step where the bias does most of its work.

Tap the chart.

Searching only for support decides what you will find. Searching for what could prove you wrong breaks the loop.
2You are bullish on a share. Which habit is a sign of confirmation bias?

Choosing sources that agree with you makes the evidence look one-sided, even when it is not.
3What is a useful counter-check before a trade?

Making the opposite case on purpose forces you to look at the evidence you would otherwise skip.
4Does knowing about confirmation bias remove it?

The bias works automatically. Fixed routines catch it better than good intentions.

of 4 correct.

Sources

Back to Trading Psychology