Eventually we all learn the truth about our investments, for better or worse. But how impartial are we in assessing the information we have now?
For every actively-traded share, there are people who think it's worth buying at the present price, and those who think it's worth selling -- two diametrically opposed views that result in a market. Bears and bulls, slogging it out.
When we buy a share, we obviously believe that bull case, at least on balance. But what happens when some annoying new information comes along that threatens to interfere with that balance? Feels a bit uncomfortable, doesn't it?
Psychologists refer to this as cognitive dissonance -- an incompatibility or disharmony between beliefs. Charlie Munger, Warren Buffett's business partner, cites the tendency to avoid or promptly resolve cognitive dissonance as a major cause of misjudgments.
Specifically, we do this in two closely-related ways:
- Searching for or interpreting information in a way that confirms our preconceptions. This is called the confirmation bias;
- critically scrutinising information which contradicts our prior beliefs, while accepting uncritically information that confirms our prior beliefs; sometimes called the disconfirmation bias.
For example, the chances are that someone who reads The Telegraph every day is politically to the right of a daily Guardian reader. While this stereotype may not be as true as it used to be, the fact remains that we tend to seek out information that confirms our beliefs, rather than information that challenges them.
In the world of investment, we really want to be right -- our wealth depends on it. And not only have we invested our money, we've also invested our time. As a result, we can be too keen to dismiss arguments that don't correspond with our views.
But for the sake of our wealth, we owe it to ourselves to be as impartial as possible when weighing up the pros and cons. The Motley Fool discussion boards are excellent places to debate investment ideas, and other topics, in a constructive atmosphere. Beware, however, as they too can occasionally be examples of group reinforcement -- simply using them to confirm our existing beliefs would defeat the purpose.
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