• Justin Halvorson

Cognitive Biases

Updated: Feb 11



Does access to information make us more rational? We are living in revolutionary times, anyone with a smartphone and a Wi-Fi password has access to the enormous amount of human knowledge that has accumulated over the centuries.


Investors can track returns of their favorite companies at any time and pay nothing for the privilege. But has access to this amount of information made every investor a millionaire?


Human beings have internal biases that influence the way we see the world and choose to operate in it. Psychologists call these cognitive and emotional biases, and investors fall victim to them even in the current information revolution.


Cognitive biases refer to the “mental shortcuts” we use to help us make decisions. They prevent us from being overwhelmed in a world full of external stimulus.


Emotional biases are very similar, but the big difference is emotional biases are rooted in our fears & desires, where cognitive biases lean toward our reasoning.


Confirmation bias, a type of cognitive bias, is the tendency for a person to seek out information that confirms their hypothesis about the world and to reject that which runs counter to their pre-determined narrative. This bias is shown in the world of investing every day. Investors form opinions about the stock price of a company, then continue to find information that confirms that theory, while ignoring any unexpected bad news.



Like confirmation bias, self-serving bias is our willingness to accept more responsibility for our successes in life then our failures. Most people see themselves better than average, taking personal credit for their victories while attributing failures to forces outside of their control. In the investing landscape, we see people who got lucky timing the market once or twice, preach that they have the once-size-fits-all investment answer for everyone.


Despite the information revolution we are currently witnessing, us humans are still wrestling with our cognitive and emotional biases. Access to unlimited amounts of information has made us smarter as a species, but it has also given us greater opportunity to fall victim to our own internal biases.


It is easier than ever research financial modeling online, to open a brokerage account and to form opinions about the stock prices of different companies. Access to information has broken down barriers to entry into the stock market, but it has also made it very easy to fall into a thought bubble, surrounded by people who only confirm your prior held beliefs.


Internal biases are difficult overcome, but the first step is recognizing we all our have certain biases based on our experiences. The goal is not to be completed unbiased as an investor, rather to recognize your emotions do play a role in your investment decisions.





Sources:

https://medium.com/@mhenrixon/cognitive-bias-96992e14f3 (pic)

https://store.behaviorgap.com/products/confirmation-bias (pic)

https://www.psychologytoday.com/us/blog/science-choice/201504/what-is-confirmation-bias

https://www.simplypsychology.org/fundamental-attribution.html