Confirmation bias is the human tendency to seek out and retain information that matches our existing beliefs. This type of bias allows us to streamline decision making. It is comfortable because we avoid having to deal with contradictory information. We get to prove what we already know and that makes us feel better.
Academics in the field of behavioral economics study how confirmation bias affects financial decision making. Vendors of products and services use it to their advantage. Social media platforms have algorithms to present us information that caters to our preconceived notions.
Why is it dangerous for our finances?
Confirmation bias can cause us to make short- sighted financial decisions. Couple confirmation bias with the natural human desire to value the present more than the future can lead to depletion of an emergency fund. In fact, when it comes to investing, coupled with our human desire to be part of the tribe, it can cause us to chase investment bubbles.
How can we rise above confirmation bias?
Generally, we can avoid confirmation bias by searching for information from a variety of sources. Consider who is presenting the information, level of expertise, and their motivation. We can follow certain rules of thumb that automate financial decisions such as automated dollar-cost average investing.
Cognitive biases are inherent in human nature. Awareness is the first step to conscious, reasoned financial decisions.