Confirmatory Bias

“How not to be your own worst enemy”

Confirmatory Bias

Introduction

We are twice as likely to focus on affirming information:

1. We find a company or investment which we think is great value

2. We look for information that agrees with us, and tend to only see information as supporting our hypothesis

3. We like to be agreed with, to have our views confirmed and to listen to those who have the same view as us

Introduction

This is called confirmatory bias, to avoid this:

1. Find a company or investment we like and think is great

2. Then destroy that company or investment

“Companies die and how they’re killed…here are the ways you implode: you don’t generate cash, you burn cash, you’re over-leveraged, you play Russian Roulette, you have idiots for management, you have a bad board, you ‘de-worsify’, you buy stocks too high, you lie with GAAP accounting.” Bruce Berkowitz

Let’s see how we can avoid confirmatory basis by having a game plan…..

Confirmatory bias

The brain looks for patterns, we have so much information to deal with we delete what we deem unnecessary

We base the value we place on information on the value we place on the current information we have – consider “what if our current values are wrong?”

Consider Weapons of Mass Destruction – same facts but fundamentally the outcome is dependent on pre-held beliefs:

Political views Human Rights views Nationalistic views

Confirmatory bias

Whatever we are doing, including investing we turn to confirmatory bias

Need to adopt a process of falsification – Darwin looked for what did not fit

Confirmatory bias – taking the right steps

There are no hard and fast rules but:

Talk to people who hold opposing views

If you cannot find the intellectual flaw in their arguments this suggests there are some in yours

Don’t look to confirm what is believed

Expose belief to the acid bath test

Confirmatory bias– summary

You find a company or investment you like

Ignore the noise, kill the company or investment

Then be completely honest with yourself and ask whether you still want to invest in that company or investment