Confirmation Bias Could Be Costing You Money

By Ande Frazier
confirmation bias

2020 has been, well, a year. So much has changed and impacted our day to day lives, it is not a surprise that most people feel on edge. One way this is manifesting is through our financial decision making. Personally, I have spent an unusual amount of time in the last few months talking people through their emotions and stress with money. And even though I have spent years researching behavioral finance, never before have I seen it play out in the day-to-day lives of people as evidenced in the last few months. What I am noticing is that people are operating with an extremely high level of confirmation bias.

Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs. When you look at what is happening with the election and Covid-19, it is clear that people are choosing to believe only those things which reinforce a belief they already have. What is even more unusual, is that we are now actively choosing to only interact with people who hold similar beliefs. 

Have you checked social media lately? People are unfriending people who are not in alignment with them politically, ending long-standing friendships. Some are even jumping ship from more common social applications to only interact on social media platforms that espouse their beliefs. Even deciding which news channel to watch is an example of confirmation bias. What happened to being open-minded and exploring different viewpoints? What happened to a good, educated debate?

What concerns me about this is that many are now making critical financial decisions based on their confirmation bias. Do I stay in the stock market or move out now? Should I start making plans to move or wait to see what will happen with the housing market? Can I reach my financial goals if the administration changes taxes? Should I invest in pharmaceuticals or Amazon? All of these questions come from a place of fear, not necessarily an opportunity. 

The danger with confirmation bias is that once you have formed a belief, you then evaluate all the information you see and hear with the belief that you are right. Then you will continue to look for things to prove that you are right and discount any information that contradicts your beliefs. Our brains are hard-wired to do this without much effort or acknowledgment. 

When you combine confirmation bias with false beliefs and self-judgment, this results in acting out by overindulging or taking unnecessary financial risks. Unfortunately, when you act out in this way, you might experience an initial chemical high of sorts, until that high evaporates, which leaves you feeling empty and worried. Suddenly, you find yourself caught in a loop of feeling good, then feeling bad and so forth, ultimately, getting you nowhere. 

When you consider all the things that influence our thoughts, feelings, and beliefs about money, it is no wonder we are not getting ahead. If we continue to let our emotions and our confirmation bias be the guide for decision making with our money, we are doomed to make unfortunate mistakes. And if we are not careful, we could make irrevocable decisions that will affect us long term. 

With confirmation bias running amuck, how do we start to make sure we aren’t falling victim to that for our financial decisions? First, you have to be aware that confirmation bias is happening to you. Are you getting information from only one or two sources? Are you only researching one side of a position? Do all your friends agree with you all the time about what to do? Do you ever get push back on your ideas or thoughts? 

If you are not experiencing a difference of ideas and perspectives, then you aren’t really getting the right information you need to make an informed decision. Consider speaking to a financial neutral: who is invested in what your long term financial goals are and who has the expertise to work with people who are in the trenches of emotional decision making. A financial neutral is able to take the variety of information they are getting and extrapolate the economic data and trends to help guide you in an unbiased logical way. 

And lastly, make sure whenever you are making a big decision with what you should do with your money, that you are anchoring that back to your core values and goals. If your decision isn’t anchored in what is important to you about money and its true purpose, then consider that the decision might not be the right one for you to make. 

Even though this year has been a challenging year for many of us, we don’t have to let confirmation bias run the day. By being aware of its hold on us, we can decide to step back, get different viewpoints, and take the time to look at things logically and reasonably.