Fri, 06 Jul 2018 12:45 IST
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Selective Information Processing-Confirmation Bias

Most of financial theory has been laid upon the fundamental assumption that all market participants have the same set of information. This has been debated over for decades for its correctness. However, recently advances in psychological theory have shown that even if two people have the same set of information, they are likely to process it differently.

The way they process this information is called the confirmation bias. There is a flaw in thinking, if you consider rational reasoning. However, since most of us know for a fact that decisions being made in the stock market are far from rational, learning about this is important.
The confirmation bias says that while we are actually going through information we do not process it without taking sides. In emotional issues, such as investing, we want to believe something. For instance, let’s say you have invested heavily in Stock A and have a gut feeling that it is going to rise. It is likely that you will pay attention only to the information that confirms your beliefs and ignores all that opposes it. Confirmation bias is the reason that proves why people make seemingly illogical decisions while participating in the stock market.

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