Confirmation Bias
The tendency to seek out and favor information that confirms existing beliefs while ignoring contradictory evidence.
What is Confirmation Bias?
Confirmation bias leads investors to actively seek information that validates their existing position on a stock or market while discounting or rationalizing away contrary evidence. An investor who is bullish on a company will read positive news about it carefully while skimming over analyst downgrades. This bias perpetuates conviction in poor investment theses, suppresses portfolio rebalancing, and causes investors to build overly concentrated positions. Confirmation bias is reinforced by social media and news algorithms that serve investors content aligned with their prior views.
Example
An investor holds a concentrated position in a retail company. When same-store sales decline and the company loses market share to online competitors, the investor dismisses the data as 'temporary headwinds' while eagerly reading optimistic management commentary. By focusing only on confirming information, they hold through a 70% price decline. A systematic pre-mortem — asking what would have to be true for the investment to fail — is a common technique to counter confirmation bias.