Are you framing the question, as per the answer you needed to hear ?
Posted By: Admin
The normal rule is we answer as per the questions raised. However sometimes we are also adept at framing questions that result in the answers we are seeking. These are biases in our decision making process that lead us to make errors in our judgement. Let me explain in an investment scenario…
As investors we are constantly trying to figure out the next course of economic actions and progress as we have a vested interest in the same. Some of us believe that the current Equity market is a little high and therefore there is some sort of a correction that is due to happen in sometime. So we are constantly looking for data in the newspapers, TV channels that confirm our thinking. We read mostly what conforms to our thinking and not otherwise. Even if there is a data that does not confirm to our view, we dismiss it as an exception or a special case , choosing to focus more on the view we have held.
People who have held that view have missed the entire stock market rally that has happened after the big Covid corrections in early March till date, because we believed that the markets were expensive and they would have to come down.
Confirmation Bias is the mother of all misconceptions. It is the tendency to interpret any new information, so that it becomes compatible with our existing theory or conviction. This can be very painful in investing.
World’s most successful Investor Warren Buffett says “what the human being is best at doing, is interpreting all new information so that their prior conclusions remain intact”.
So if our Government believes that the Indian economy will make a V shape recovery post Covid lock-downs, they are most likely to see only information that confirms to their view, any aberrations will be seen merely as an exception to the rule or a special case. The recent stock market spike will also be seen in the same light as to saying that if the stock market is also doing well, then the economy must be recovering very fast. ..This can very dangerous. The way to overcome from this Confirmation bias is to look for data that somewhat counters our view, study it carefully to understand if one needs to re-frame their stance on a particular idea. It needs a lot of time , energy, analysis to do this and hence only a few will attempt and very few will be able to see the picture as it is and not as they want to see it.
So before investing , take a pause to check if you are finding answers to questions or are you framing questions as per answers you needed to hear ? your answer could be the difference between Profit & Loss.
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Category Finsherpa | Tags Financial Freedom
