Confirmation Bias Can Make You Think You Are Giving Unbiased Advice When You Are Really Justifying Your Own Thinking
If you’ve ever read anything on behavioral finance, you’ve heard of confirmation bias. We look for other opinions that back up—or confirm—our own. And we ignore, discount, or find fault with opinions that don’t.
It can show up like this:
- We continue to think the market (stock market, bond market, commodities market, gold market, mortgage market, etc.) is bullish (or bearish) and refuse to read reports with even a hint of a bearish (or bullish) tone.
- We stay positive (or negative) on an asset class, investment vehicle, or strategy even though the signs are clear that its cycle is turning.
- We subconsciously impose our own risk tolerance on our clients. In reality, they may be less—or more—tolerant of market volatility than we are. This becomes evident when they have lost money either from missed opportunity or in a downturn.
- We feel we know what is best for our clients, despite their level of readiness for our solution. We plug their situation into our preconceived notions and recommend a solution they know is not a good fit, yet they go along with us because we are ‘the advisor.’
- We get so entrenched in our own way of doing things that we miss new technologies that make us more efficient. Or we ignore new ideas—especially from younger people whose approach we do not understand. So we stagnate in ‘what’s always worked’ instead of challenging ourselves with new ways of thinking or with new approaches.
Think this isn’t you? We are all human, after all. It’s no disgrace. But it does get in the way of offering advice which truly fits clients’ needs.
So here are some ways to counteract it:
- Admit that you are human and are, therefore, subject to behavioral biases. This doesn’t make us any less brilliant; and it will put us on a plane where our expertise will be immensely more valuable.
- Practice thinking and doing things differently. If you are right handed, use your left hand to do simple tasks like unlocking a door. Drive a different route to work. Keep practicing—it will become easier each time you do it. When you master that task, add another.
- Purposefully expose yourself to contrary ways of thinking and different approaches. Read five different commentaries. Talk to five people whose opinions you've never before considered. Observe your reactions, step back, and take note of your automatic responses. You don’t have to change your core principles; but you can recalibrate yourself.
These steps will help you recognize how confirmation bias shows up in your normal ways of thinking. It will also give you an authentic place to come from in helping to educate clients about their own behavioral biases. This will cut a clearer path toward an optimal solution for your clients. It will directly impact the quality of your investment advice and the success of your business.
This Website Is For Financial Professionals Only
