Investing Mistakes #2 

 

In the investing world there are many hidden dangers. Large foreign currency fluctuations, for example, can have massive impact on companies whose product are produced in one country and sold in the currency of another.  

A good example of that would be the large Australian mining company, BHP, whose major products are mostly extracted in Australia, but sold in US dollars. 

Other hidden dangers are sometimes of our own making. In the latest episode of Investing Mistakes, we look at a problem that every single one of us is susceptible to, then we offer strategies to mitigate the risk. 

 

Confirmation Bias 

Confirmation bias is the tendency to pay close attention to, or view as more credible, information that supports/confirms our existing beliefs on a particular subject, while disregarding data which challenges those beliefs. 

Confirmation bias is a cognitive process which is natural to everyone, which results in a one-sided view of a topic or situation 

To give you a simple example of confirmation bias I have included an excerpt from the website, Very Well Mind. 

Imagine that a person holds a belief that left-handed people are more creative than right-handed people. Whenever this person encounters a person that is both left-handed and creative, they place greater importance on this “evidence” that supports what they already believe. This individual might even seek proof that further backs up this belief while discounting examples that don’t support the idea. 

For visual representation of the idea, I’ve included these two great videos 

 

As outlined in the videos, at times, we all suffer from confirmation bias. The effects of this bias can be particularly damaging when it affects our investment choices, especially so in biotech. 

The most successful investors have a deep understanding of themselves and are able to implement strategies to challenge their investing beliefs. 

How can we challenge our confirmation bias? 

  • Seek out information from a range of sources 
  • Give higher weight to well-known/respected sources of information such as scientific journals, industry experts, independent researchers etc. 
  • Play devil’s advocate – build a case against. 
  • Actively seek out alternative views on the topic of interest 

To finish up, here is a useful video detailing 5 ways to combat confirmation bias.  

 

In case you missed the previous edition of Investing Mistakes you can find it here:

Investing mistakes. #1 | Undiscovered Biotech


0 Comments

Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *