This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 26 March 2016.
If you know someone who has a particularly strong political view, you may have noticed how this influences the newspapers or magazines they read and which television channels they watch. It’s a generalisation of course, but if they were somewhat conservative they might prefer to read The Daily Telegraph or The Australian, and get their TV news from Sky News. If their political views leaned to the left however, they probably prefer to watch the ABC and read The Sydney Morning Herald. That’s not to accuse the various media outlets of deliberate bias, it’s simply an acknowledgement of the fact that most news sources tend to attract readers or viewers of a particular political viewpoint.
This propensity of ours to seek out sources of information which corroborate and reinforce our views and opinions has a name – confirmation bias. If we hold a particular view, we feel more comfortable reading articles or watching television shows which broadly support our opinions. It’s as though we draw comfort from the thought that we’re not alone; we’re happy that there are others that feel the same way we do. While it’s arguable whether the presence of confirmation bias is a good or bad thing when it comes to politics, confirmation bias should be avoided when it comes to your investments. The danger with confirmation bias is the selective thinking which clouds your judgement. You may own shares in a company which you believe has great prospects so you decide to do a little research, perhaps reading the company’s marketing material and financial reports, or listening to a recorded interview with the CEO. You might even jump onto an online forum where fellow shareholders discuss the latest news and developments emanating from the company, all heartily agreeing with one another about what a great investment they had purchased.
Can you see the danger? All you’ve done is look for evidence which confirms your already-held view of the company and you’ve made no effort to seek out information which contradicts your views. This is a perfect example of confirmation bias. Proper due diligence should include an active effort to find information which challenges your views and opinions – it helps you to question your own position more forcefully. It doesn’t mean your opinion is wrong; you just want to make sure you have considered every angle. Not that it’s going to help much when it comes to politics, as said by John Kenneth Galbraith, “Politics is the art of choosing between the disastrous and the unpalatable.”