It’s amazing how many yellow cars are on the road, or at least it seems that way if you have just bought or are contemplating buying a yellow car. The truth is there are not suddenly more yellow cars on the road today than there was yesterday, all that has changed is your awareness of yellow cars.
This is a form of confirmation bias that can trick our brains if we let it. Confirmation bias is natural to humans; we seek out evidence to support whatever world view we have. When we are talking about investments this can become a big problem. Maybe we love Apple products and want to own Apple stock. Confirmation bias causes use to read and remember everything good written about Apple and ignore everything we come across that is negative about Apple.
Confirmation bias can even keep us from making any investments at all. If we are fearful, we discount good news and focus on all the things that are wrong with the financial markets. We can even ignore the fact that the stock market has throughout its history gone up much more than it has gone down. Through wars and depression and many, many recessions the US Stock Market has always managed to go up most of the time, but there are many who will deny this because it does not fit with their world view.
So the next time you have a great investment idea, take a moment to consider the other side. What if you are wrong? Can you look at that investment objectively and move on or will you only look at all the yellow cars?
