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Confirmation Bias : How It Impacts Your Finances and Trading

confirmation-bias
confirmation-bias

Managing money can sometimes be very confusing and frustrating with lots of twists and turns. One of the important factor that impacts our decisions in trading is Confirmation Bias, often without us even realizing it, In this article, we’ll discuss how confirmation bias impacts our trading and investment decisions, how it affects our  choices that we make with our money. So, grab your financial flashlight, and let’s shine a light on this topic common phenomenon!

Decisions in stock market are influenced by many ways of thinking and its tricky. We’ll break down Confirmation Bias what it means and how it can affect the trades we do while trading and investing. We will use simple words, we want to make sure everyone, whether you’re new to trading or not, so that you can understand and avoid the impact of confirmation bias on your trading decisions.

Understanding Confirmation Bias in Finance

Confirmation bias in trading is like wearing sunglasses. For example when you wear brown sunglasses you see everything in brown, when you wear red sunglasses. You see everything is red, It’s a tendency of human being that favors information that supports what you already think and believe about money, investments, and trading, while you conveniently ignore or downplay anything that challenges those beliefs.

For eg. When you buy a stock you have a bullish view, after you buy suddenly the stock starts going down. Now instead of selling that stock you hold it thinking it will go up again, you start reading articles on websites how good that company is, and opinions that support this belief, making it feel like you’re on the right track. But what about the technical analysis its has broken major support and its most probably go down,

Confirmation bias creates a financial blind spot which you can not see

In trading, confirmation bias happens when people look for information that supports what they already believe about the stock. This leads to making choices based on what you want to believe, rather than what might be the best decision at that particular moment.

How did Confirmation Bias origin in Trading

The roots of confirmation bias in trading are intertwined with our natural desire for financial security. We don’t want to lose what we have and we want to be right.

Our brains are evolved to make quick decisions that is require for our survival, and this instinctual tendency clashes with the complexities in trading. We often like to read or hear information that matches with our beliefs because it feels secure, safer and more comfortable, even if it means missing out on some important data points

Manifestations of Confirmation Bias in Finance

Confirmation bias manifests in various ways in trading. Here are some common scenarios you might recognize:

  1. Cherry-Picking Data: We Select only the financial information that supports our trading decisions and ignoring data and technical analysis that suggests potential risks.
  2. Ignoring Contrary Opinions:  We ignore contrary advice or opinions that is different from our own, especially when it challenges our current financial strategy.
  3. Sticking to Losing positions: We Hold onto a losing position longer than we should because admitting that we have made a wrong decision goes against your initial belief in their success.
  4. Overlooking Diversification: We Focus excessively on one type of investment or trading strategy due to a preconceived notion about its guaranteed success when we have to admit that there is no holy grail in trading.

Consequences of Confirmation Bias in Trading.

The impact of confirmation bias in trading can be profound, leading to both short-term and long-term loses

  1. Poor Investment Choices: Confirmation bias leads us to make investments and take trade based on incomplete or biased information, which results in poor decision-making. 
  2. Missed Opportunities: When we do trading on  information that aligns with our existing beliefs, We miss out on valuable trading opportunities that could that could be profitable.
  3. Financial Losses: Holding to losing positions or ignoring reversals in trading can result in significant financial losses.
  4. Stagnation: When we are reluctant to consider alternative trading strategies can slow down your financial growth and it will prevent you from adapting to changing current market conditions.

How to deal with Confirmation Bias:

Now that we have understood the impact of confirmation bias in trading, let’s explore some strategies that will help you to overcome it and held you trade better.

  1. Stay Informed from Various Sources:. Do not rely solely on your analysis or news of specific channel or opinions that confirms your existing beliefs. Seek out different vies form professionals to get a more balanced view.
  2. Encourage Healthy Scepticism:  Whenever taking any financial decisions, take it  with a healthy dose of scepticism. Question your beliefs and be open to the possibility that your initial beliefs might not always be accurate and you need to change them accordingly. 
  3. Regularly Review Your Trading strategies and Investments: Always Take time to periodically review your trading strategies objectively. Assess the performance of your profit and loss account, and consider whether your financial goals can be met with your beliefs and trading strategy.
  4. Seek Contrary Opinions: Go our and actively seek out opinions of people who are masters in your field and analyses that contradict your current views. This will provide you with a more comprehensive understanding of potential risks and rewards.
  5. Set Realistic Goals: Establish realistic financial goals in trading is very essential and always be open to adjusting them based on changing circumstances in stock market. This flexibility can help you to adapt in evolving market conditions without being overly influenced by your beliefs.
  6. Write Down Your Trades in Trading Journal: Keeping a trding journal can help. Write down why you have taken that trade. This will help you when you look back, you might be able to see if you’re falling into the confirmation bias trap

Key Takeaways on Confirmation Bias

Confirmation bias in trading is like a fog that clouds our judgment and hinder our ability to take good trades. When you recognize this cognitive phenomenon and you start actively working to mitigate its impact, we can easily navigate the twists and turns in trading with greater clarity. Whether you’re a professional trader or just starting your trading journey, understanding and addressing confirmation bias is a crucial step that you can take towards achieving your financial goals.

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