Behavioral economics ended the idea of rational economic man. Here’s a quick review of the top seven common human behaviors that are irrational and cost investors money.
4. Confirmation bias
How it tricks us: It’s a basic human flaw: We like to think we’re always right, and will go to great lengths to seek out information to uphold our preconceived notions. For instance, one legendary Ohio State study surveyed people on their political views, and then let participants browse through an online forum with various opinion pieces. One take-away? The researchers found that people spent 36 percent more time reading an essay if it supported their personal beliefs.
The problem with confirmation bias is that when we refuse to take in conflicting information, we filter out important data that could help us make more informed decisions. For example, you may get a “hot tip” about a company and focus on all the good news you read (“It’s got a patent on a great idea!”), while ignoring the bad (“Revenue is way down!”).
On the flip side, Gresham often sees this bias also feeding into people’s deep-seated fears over investing in the stock market. “So when they have friends who lose money or they see the market tanking, it confirms that [investing] is too dangerous,” she explains.