confirmation and recency bias

Are Your Thoughts Trapped by Confirmation and Recency Bias?

Erik Personal Development and Lifestyle, Personal Growth, Thoughts of a Mastermind 6 Comments

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Recently, I’ve been doing a lot of research about the financial markets and different investment instruments.

I have a hypothesis and opinion about what I think is right, but I can’t just rely on a hunch if I want to be successful.

When I started to research and started reading a bunch of papers, articles, and books on the topics I was interested in, I kept finding what I was looking for and felt good about my original thoughts.

One of the principles I try to live my life with is having a skepticism about my thoughts and to look to challenge them if I’m not 100% confident.

Starting out, I was committing a common sin of researchers and investors: being affected by confirmation bias.

It’s human nature to be affected by bias. Today, I wantto share with you how I and you can overcome this faulty thinking and find the truth in the noise.

What is Bias?

First, before we get into some examples and how to overcome bias, I should introduce and define bias.

Bias is defined as follows:

a particular tendency, trend, inclination, feeling, or opinion, especially one that is preconceived or unreasoned

Unintentionally, humans have bias in their thinking from the day they are born.

Where is the best place to live? If the person you are asking is still living in the state they grew up in, I’m going to guess that person would say that state.

Again, this is human nature, but something that can be overcome.

There are many biases which can trap our minds, but for this article, there are two forms of bias that I want to call out and talk about:

  • Confirmation bias
  • Recency bias

What is Confirmation Bias?

Let’s talk about confirmation bias first.

Confirmation bias is incredibly important to understand in 2018 as many things portrayed and covered in the media is polarized.

Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses.

An example here (I’m going to go with politics for ease):

Let’s say you are trying to form an opinion about the current president. Maybe you are naturally a little bit right leaning, and you are trying to confirm or disprove your hypothesis that the current president is a good person.

Going to Google, you might type in something like “Is Donald Trump a good person?”. Maybe you type in “Is Donald Trump a bad person?” There’s many different things you could type in.

(if your blood is boiling at this point, this is just an example… maybe I should have stayed away from politics)

Confirmation bias is basically that whatever you are looking for, you will find it.

If you think Donald Trump is a good person, you will naturally side with information that confirms (hence confirmation) your position that he is a good person. If you hate him as a person, then any information you come across that could disprove your opinion.

While I’m not going to share my opinion on this matter, I want to highlight confirmation trapping our thinking and thought processes because this is real and happens every day.

Let’s talk about another form of bias now.

What is Recency Bias?

Recency bias (also known as selection bias), is the tendency to overweight recent information in your thought process (or overweight information which you have cherry picked to support your point).

An example of this might be the following:

Let’s say I’m trying to form a view on the stock market’s future movements.

I might think that it will go up in the next year, so I want to invest more.

Looking at charts and data, I might look and see, well, in the past year, it’s gone up, so I’m going to ride the wave of momentum and stay invested.

I put “in the past year” in bold, because this illustrates the concept of recency bias: I cherry picked 1 year because it was convenient for my hypothesis.

What happened in the year before? What about the 10 years before? Were there any factors influencing market performance in those periods which may or may not have an influence in the next year?

There are many things to consider when doing this sort of thinking and reasoning.

Examples of Bias in My Thought Process

confirmation and recency biasRecently, I’ve been waayyyy down the rabbit hole.

Like I said in the intro, I’ve been looking at financial markets and different investment instruments.

This is my personal opinion, please don’t make any investment choices off of this discussion. I’m not a financial professional and this blog is for entertainment.

My main hypothesis is that we are at the top of the credit cycle and market, and the risk/reward is not favorable to being in stocks.

What I noticed is that when I started doing research, I kept landing on doom and gloom sites.

“BUY GOLD”, “MARKET CRASHING BE PREPARED” – things I kept seeing and I thought my hypothesis was correct.

Part of critical thinking is realizing your biases and being careful in your thought process.

After landing on these sites, I had to dive deeper and think harder. I was becoming a victim of the confirmation bias.

If I wanted to fully vet my hypothesis, I would have to look to the other side: could the stock market keep going up and if so, why?

In addition to trying to avoid being biased by confirmation, I’ve also looked to not just look at recent data, but data in history.

After all, history doesn’t necessarily repeat itself, but it does rhyme.

As of the last few days, I’ve moved to examining previous market crashes (US Markets 1987, 1997, 2001, and Japanese Market 1989 in particular), to try to tease out any common relationships between then and now.

I’m still searching, but I’m feeling better about my thoughts because I’m avoiding bias and not being trapped in an echo chamber.

How to Overcome Bias in Your Thinking

For you, first, it’s good to recognize these biases and understand that they are human nature to be trapped by them.

Next, thinking critically and considering what else you could incorporate into your thought process is important to make sure you don’t fall back into the previous trap.

I hope you’ve learned some interesting points to consider in your life, and have enjoyed this article.

Readers: are you inadvertently employing bias in your thinking? What do you think you can do to overcome this bias?

Erik

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Comments 6

  1. I love studying behavioral economics, but…

    I’m not sure I believe it’s fully possible to remove these biases from your decisions, especially in the moment. You can mitigate some of it with presentation and being aware, but our brains are hard wired to be that way. As such my investment philosophy at least is somewhat akin too I can’t overcome those biases and I can’t know so put it on auto pilot with index funds.

    I’ve seen your comments on twitter recently around indexers and the belief the market will always go up. I do agree that’s not a forgone conclusion. But I also believe there is no way I or anyone else can predict that. I also know that statistically I’m more likely to work out ahead by staying the course rather then churning my accounts. So that’s what I do.

    1. Post
      Author

      Yeah definitely, there’s no way we can remove all biases… it’s is human nature after all!

      Another point I thought of reading your comment is that once you start to bring in personal and family goals, then things start to shift as well.

      Two people might have practice having zero bias, but because of their goals, their view might be different.

      Thanks for pointing out my recent twittering 🙂 It’s been more along the lines of having fun and trolling… which might not be the best, but when people start talking about uncertain things like they are a certainty, this is almost getting to some sort of euphoric state, which when this happens, it’s not good.

      I’m throwing caution to the wind, that while yes, data has shown in the past it goes up, we have no idea what the long term looks like and as such, just need to do our best.

      Thank you again and I appreciate your thoughtful comment and words.

      Erik

  2. I was a big victim of confirmation bias for most of my life. I think I have a much better handle on it now. What turned it around for me, so to speak, is the realization everyone, whether their business is politics or commerce, is selling something. And once you know you’re being subjected to a sales pitch, it’s easy to skeptical. Great post, Erik.

    1. Post
      Author

      Oh yeah… well, isn’t that the gist of human beings? We talk about things we like and would recommend to others (a sales pitch of sorts).

      That gets into some other biases as well 🙂

      Thanks Mr. Groovy for stopping by!

  3. I think it’s a super power when you start to recognize your own biases. It’s very easy to slip into any of these examples listed above…especially confirmation bias. And i think many times that is what gets us in the FI community.

    We only expose ourselves to certain types of information… and thus we are always right about what we think. It’s a very slippery slope in the world of money and investing in my opinion.

    Great post Erik!

    1. Post
      Author

      Thanks HLT for stopping by and the comment!

      It’s definitely tough, especially now that there is so much information and you have algorithms which are feeding you based on your preferences. It’s tough to figure out what’s right and wrong!

      Erik

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