Today, I’d like to start a new series that will be instructive to all investors on Confirmation Bias And What The Media Can Teach Us About Personal Finance.
Let me begin this series with some background.
So, it’s been approximately nine months since the horrific October 7 attacks on Israeli civilians by Hamas. Sadly, as of this writing, there are still over one hundred hostages being held in Gaza.
What I find absolutely astounding is the lengths mainstream media will go to place blame on Israel for the current circumstances in Gaza. It doesn’t take superior intellect to understand the situation. Israel was brutally attacked; they are trying to rescue their kidnapped people and prevent something like this from ever happening again. Yet, a constant stream of news headlines continues to equate Hamas’s barbaric actions to Israel’s right to defend herself. The mental gymnastics that it takes to make this narrative sound logical is breathtaking.
A good example of this intellectual dishonesty took place a few months ago when one of the top news stories on Reuters was “ICC prosecutor seeks arrest warrants for Netanyahu and Sinwar.” Regardless of whether you love or hate him, Benjamin Netanyahu is the democratically elected leader of a vibrant, functioning country. He is not a terrorist committing crimes against humanity. Sinwar, on the other hand, is the leader of an internationally recognized terrorist organization that uses murder, rape, and violence against civilians to achieve their goal of killing Jews. Hamas’s charter makes it clear that killing Jews is their goal. Yet, seemingly intelligent, well-educated people at the ICC, and the media folks at Reuters, go out of their way to draw a moral equivalence that does not exist.
The question I constantly find myself asking is why does this intellectual dishonesty occur? The answer, at least partially, is due to confirmation bias. Confirmation bias is the tendency of people to favor information that confirms or strengthens their beliefs or values and is difficult to dislodge once affirmed.
Many media outlets around the world selectively use data and stories that support their predetermined anti-Israel agendas. Therefore, instead of focusing on the cause of this war (Hamas’s terrorist activities) and the way it can end (Hamas’s surrender and releasing innocent Israeli civilians from captivity), the focus is on the plight of the people of Gaza (whose woes are also entirely and exclusively due to Hamas). Overlooking material information that doesn’t support your thesis or agenda is quite convenient.
While the confirmation bias that I see daily in the news is infuriating, it is not the only place that this heuristic arises in our daily lives. In fact, this bias is a major stumbling block for investors as well. It causes folks to selectively gather information that supports their personal investment viewpoint, while filtering out potentially useful facts and opinions that don’t coincide with their preconceived notions. Furthermore, it may lead to overconfidence in our beliefs, sometimes in the face of obviously contrary evidence.
For example, an individual may decide to invest in a company, whether for legitimate reasons or because of their catchy message, sleek products, or being enamored with the CEO. As new information emerges, attention is given solely to commentary that supports the initial viewpoint to buy the stock, while ignoring any obvious concerns of impending financial disaster like lower sales, financial fraud, or a possible bankruptcy. Holding on to such an investment may seem silly to the objective outsider, but people tend to reassure themselves of their original thesis even if it could lead them to financial ruin.
Another confirmation bias scenario that I often see within social circles is when a friend tells his buddies about an exciting investment with high returns and virtually no risk. When people tell me about these “deals” they are so jazzed about the potential upside, they frequently ignore the laundry list of associated risks. I remind friends that risk and reward are inextricably linked. If they are being promised high returns, they will need to take a high level of risk. These risks can encompass a variety of things, including illiquidity, default, and leverage. Conveniently overlooking an investment’s many glaringly obvious negatives, and only focusing on the potential upside that aligns with your excitement, can lead to the loss of a lot of money.
Every person suffers from some form of investment related confirmation bias. The key is not letting it derail you from being able to achieve your financial goals. It’s important for investors to establish a process to overcome biased behaviors, which should include three key components, which I will start covering tomorrow!