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This Little-Known Psychological Weakness Could Be Causing You To Make Disastrous Financial Decisions

You have definitely fallen prey to this weakness – we all have. Here’s what we can do about it.

 

As humans, we have a psychological weakness that make us vulnerable to making less-than-rational decisions in even “logical” areas of our lives like personal finance and investing.

It is this weakness that gives people the impression that Yishun is more dangerous or unlucky, even though statistically it is just as safe, if not safer than other estates.

Today, we’re talking about confirmation bias.

What Is Confirmation Bias

Investopedia defines confirmation bias as “A psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs.”

It is worth noting that as with other forms of bias, most people are often oblivious to them.

Confirmation bias affects how we process new information. Rather than carefully weighing new information on their own merits based on facts, we tend to subconsciously (or sometimes, even consciously) put more weight to facts and sources that fit and reaffirm our preconceived notions.

In other words, we already have our conclusions and favour materials that support those conclusions.

Digital and Social Media Makes It Worse

More people than ever are online and using social media. Ironically, platforms like Facebook and Google that purport to facilitate the free exchange of ideas among people are strengthening confirmation bias.

It is no secret that Google tweaks search results for each user based on a variety of factors in an attempt to optimise for what it thinks you are looking for. Based on your browsing and search history, Google knows the kind of websites you’re more likely to want to see and prioritises them in the search results.

The confirmation bias problem is also worsened by how interactions on Facebook are structured. On Facebook, we join Groups with like-minded people. Facebook also sees kind of posts and users whom we engage with and shows less of those we skip.

When we post something, those who agree with us would Like it. This reinforces our views, because other people agree with us! But for every Like we receive, there could be dozens of people who completely disagree with us, but can’t be bothered to have a debate with us online or weren’t even shown our post by Facebook.

How It Affects You In Personal Finance and Investments

What do you think of cryptocurrencies? How do you view insurance agents? Do you believe that CPF policy changes are for the good of Singaporeans?

You probably have views about the above. Are these opinions the result of extensive research, robust debate, and careful weighing of facts? Or do you think you’re guilty of confirmation bias, thereby affecting your cause us to make less-than-optimal choices?

For investors, confirmation bias also functions when researching a stock or asset to buy. People bullish on cryptocurrencies tend to put weight on articles about how the prices of cryptocurrencies are soaring, which is a fact. What is also a fact are the risks people take when buying cryptocurrencies today.

Read Also: The Glaring Risks Bitcoin Enthusiasts Aren’t Talking About

Our inherent weakness of confirmation bias is made worse by online and social media. If we don’t consciously do something to mitigate its effects, we could be making important, life-changing personal finance decisions with information that is one-sided, or even wrong.

What You Can Do About It

Confirmation bias, though prevalent, is not unassailable! Here are some concrete steps we can take to mitigate its effects in tainting our financial decision-making.

Seek out sources that challenge your worldview. By reading content by people or publications that don’t necessarily represent your views, break out of the social media and online bubble. Another benefit of alternative viewpoints is that it offers new perspectives you have not considered (which you can disagree with) and encourages you to revisit the assumptions you hold.

Get someone to play “devil’s advocate”. Before making any decision, like buying a product or property, get a friend or professional to give you reasons why you should not go for it. Even if you eventually choose to go ahead with your original decision, haring opinions that are contrary to your plan ensure you benefit from more than one perspective (your own).

Leave ego outside. In discussions with others, agree to disagree. Rather than trying to prove yourself right, which does not give you any benefits, is would far more valuable to have an open mind that does not rule out the possibility that you might be wrong. If that case, you would be the real winner, having your long-held views corrected. Allow curiosity and concern to surface, alongside conviction.

Be being more skeptical about information. When reading something, especially if they confirm our beliefs, consciously stop and think.

Overcoming confirmation bias doesn’t mean we need to suddenly question all our views of the world, which has been built up over decades and have served us well to a certain extent. Rather, by starting to recognise our bias and assumptions when consuming information, we can mitigate the downsides and make better financial decisions.

Read Also: 3 Money Mistakes You Make Because You Were Too Lazy To Check

 

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