Investing Psychology: Confirmation Bias in Investing

Investing is a complex yet a simple process. However, it’s not always about the jargons, companies, numbers, excel sheets, and data but One of the most underappreciated forces in personal finance is not a market trend or a technical indicator. It’s our own brain. Even the smartest investors amongst us fall into subtle traps set by our own psychology and one of the most common amongst all behavioural finance biases is confirmation bias in investing.

So, what is Confirmation Bias in Investing?

In simple terms: we like being right. Our brain helps us feel right, even when reality says otherwise. It’s like a mental shortcut. Our brain filters information in a way that agrees with what we already believe in. This definitely feels good (because being “right” feels rewarding), but it doesn’t always lead to rational decisions. This is a classic example of cognitive biases in investing.

In the context of “investing mental traps” what we tend to do is:

• Selective information gathering bias: Say you bought a stock after a friend’s recommendation. From then on, you mostly read articles and reports that say it’s a great pick. Anything negative? You skip it or call it “noise.”

• Biased interpretation investments: You read a quarterly result that’s a mixed bag. But since you already like the stock, you twist the report into something positive: “They missed estimates, but the long-term story is still strong.”

• Memory filtering (Remember when we were right, and forget when we weren’t): You vividly remember the one time your hunch paid off. But forget the two other times it didn’t. Your brain is doing some selective editing.

Each of these reflects how investor bias examples play out in real life.

How it affects your portfolio

While these mental shortcuts might seem harmless, the impact of confirmation bias on portfolio can be serious over time. Here's how investment decision traps driven by confirmation bias can sabotage returns:

• Holding on to losing positions: You believe the stock will bounce back. You keep finding reasons to hold it. Meanwhile, the fundamentals are deteriorating. This is a classic case of emotional investing pitfall.

• Missing out on good opportunities: Maybe a certain sector burned you once. Now, even if a strong company from that sector looks attractive, you avoid it because it doesn’t “fit your belief system.” This emotional filter limits diversification and bias creeps in.

• Overconfidence in Investing: When you’re constantly confirming your own views, your confidence goes up. But it’s built on repetition, not facts. That can lead to taking unnecessary risks.

• Poor diversification: You keep investing in companies that follow a pattern you like, or in sectors you’re comfortable with. Over time, your portfolio becomes unbalanced.

• Falling into herd mentality: You follow people who agree with your views, watch influencers who reinforce them, and act like the crowd. You call it consensus. But often, it’s herd mentality that keeps portfolios safe.

How to protect yourself from confirmation bias

Here’s the truth: confirmation bias isn’t something you “fix” once and never deal with again. It’s a natural part of how our brain works. But right habits can help with overcoming confirmation bias:

• Seek out opposing views: Before you invest, look for counterarguments. Read an analyst who disagrees with your thesis. Ask yourself: “What if they’re right?” This is the first step to recognizing confirmation bias and protecting your capital from blind spots.

• Play devil’s advocate: Challenge your own thinking. For every reason to buy a stock, try writing down a reason not to. Ask yourself “What would have to happen for me to change my mind?”. This will help you develop investment bias recognition in the long term.

• Set clear rules before investing: Have an investment checklist. Define your entry and exit points. Set your stop-loss levels in advance.

• Review your portfolio objectively: Every quarter, zoom out. Are your holdings still aligned with your goals? Or are you clinging to them out of ego? This is key to overcoming cognitive bias and long-term discipline.

• Focus on the long term: The more short-term news you consume, the more emotional your decisions become. A long-term plan helps you stay grounded and avoid reacting to every headline.

• Rely on data, not feelings: Emotional investing prevention starts with evidence. Ignore the hype. Look at the actual numbers, revenue, margins, debt, growth. The fundamentals don’t lie.

• Use an Accountability Partner: Whether it’s a financial advisor or a friend who will call you out, managing investment biases is easier with someone who challenges your assumptions, not comforts them.

Conclusion

Remember, cognitive errors in investing aren’t rare. Your brain wants to make you feel right. But your investments want you to be right. But now that you know what to watch for, you’ve already taken the first step. From here, it’s about staying curious, staying open-minded, and building a system that challenges your thinking.

Disclaimer: This article represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report.

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