When we form an opinion, our normal course of action is to look for evidence that we are correct. In psychology this is known as confirmation bias. Jason Zweig has a nice piece in the Wall Street Journal on confirmation bias and the problems that it causes for investors. Once you form an incorrect judgement, it’s hard to throw it away again.
A recent analysis of psychological studies with nearly 8,000 participants concluded that people are twice as likely to seek information that confirms what they already believe as they are to consider evidence that would challenge those beliefs.
Why is a mind-made-up so hard to penetrate?
“We’re all mentally lazy,” says psychologist Scott Lilienfeld of Emory University in Atlanta. “It’s simply easier to focus our attention on data that supports our hypothesis, rather than to seek out evidence that might disprove it.”
Science, on the other hand, works the other way around. You start with a hypothesis and see if you can find ways to disprove it. In financial markets, a more scientific method seems to work quite a bit better than being mentally lazy. A commitment to research and a systematic process can often make significant improvements to investment results.
