This Is an Overlooked Area of Decision Making When It Comes to Investing
Research has shown that people tend to look for information that confirms their beliefs. In the world of behavioral finance, this is known as confirmation bias.
To invest profitably, however, it's critical to not only be aware of this bias, but also to affirmatively combat it. The Motley Fool's Gaby Lapera and contributor John Maxfield delve into this topic in this segment of Industry Focus: Financials.
A full transcript follows the video.
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This podcast was recorded on Sept. 21, 2016.
Gaby Lapera: The first step of doing your research, gathering all your information in order to make your reasoned conclusion, is you have to pick your sources, and you have to pick good sources. By this I mean, you have to question your sources and data: Don't take anything for granted.
For example, say you're on Facebook, and you run across a meme or a picture, and it's one of the presidential candidates with some white text superimposed. That is not a good source. Anyone could have written that. In fact, I remember a couple years back, someone printed pictures of Taylor Swift and put quotes fromMein Kampfon top of it, and people were like, "Oh, she's so original and unique!" Those pictures that you find on the internet can be from anywhere. Good sources would be places like a university or a government study. You want sources that have been examined by multiple other people who are experts in the field.
John Maxfield:Yeah. The one thing I would add to that is that you don't just want sources that confirm what you already believe. What's the point in doing a whole bunch of research if you're just adding more substance to what you already think or know? What that means is, you really need to eschew dogma, to eschew ideology. And in that place, replace it with pragmatism.
Let me give you a really timely example of how this works and how this plays into the decision-making process. We're in the middle of a pretty contentious presidential election. One of the things that researchers have found in the past is that in certain areas, like politics, when a person either hears an opinion that is inconsistent with theirs, or reads it in the political context, the part of your brain that is responsible for critical thinking -- that really deep, logical thought process -- actually shuts down. So, they put people into brain scans and ask them questions or give them information that was either consistent or inconsistent with what they already believed, and any time an inconsistent fact came up, their brain shut down. So, you need to be cognizant of that bias, that confirmation bias that is a part of your brain. When you're gathering the evidence, and when you're processing evidence, you need to consciously try to combat that.
John Maxfield owns shares of Facebook, and The Motley Fool owns shares of and recommends it, too. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.