Reason to believe

03 Jun 2013

By David Raits, Private Client Adviser

"Seen a man standin' over a dead dog lyin' by the highway in a ditch He's lookin' down kinda puzzled pokin' that dog with a if he stood there long enough that dog'd get up and the end of every hard earned day people find some reason to believe"  Bruce Springsteen – Nebraska (1982)

I have to confess there have been many times over the years that I have felt like this when reviewing the "dogs" in my personal share portfolio, because some of them did deserve a good "pokin'" with a stick, if not worse!!

Why didn't I just sell them, I think now with the benefit of 20/20 hindsight? Well the answer is I had a reason to believe at the time, and that reason was almost certainly borne out of confirmation bias. In simple terms this means that I was subconsciously filtering and interpreting information about these investments in a way which confirmed my original view - that these investments made sense. I was also subconsciously avoiding and/or discrediting information which did not support my view, or my bias.

The reality is that confirmation bias is a perfectly normal human trait that is borne out of the desire for positive affirmation once we have made a significant decision. The problem is that like most emotional factors it inhibits our ability to make rational and smart investment decisions and this is made worse by the sheer volume of financial information that is now available to investors.

There is little evidence to suggest that the greatly increased access to financial information, data and opinions we now have has actually improved investment outcomes for small investors. In fact there is ample evidence to show that the gap between the return most retail investors receive from their share market investments is still well below the market average.

There is so much information available now in the media that if you look hard enough you will find somewhere an opinion to support just about any point of view (or bias) you have. This is particularly true when it comes to investments as so much of the 'noise' that drives the market in the short term is just that... noise. And what is worse is that much of that noise is caused by media outlets whose primary agenda is to attract your attention to sell advertising space, rather than to accurately inform you.

One of the best ways to avoid becoming a victim of this phenomenon is to turn down the noise, try to limit how much of this information you consume and to train yourself to be your own 'devil's advocate.' Try and adopt the contrary point of view no matter what, assess its validity, and make sure you can dismiss it purely on rational grounds. Alternatively consider the hypothetical scenario that your investment has failed, and ask yourself the question as to what the most likely reason for this would have been.

You will be amazed at how this will alter your point of view when you actually start to look for a reason to disbelieve!!

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