Confirmation bias in investing: Why we never learn from our mistakes
template of that mistake, and we find it easy to access and use it again. Our personal financial well-being suffers from this limitation.
Researchers have long argued that we are incapable of learning from our failures. We are either resistant to learning from those mistakes or we learn the wrong things. We are tuned to feel good about ourselves. Contemplating our mistakes hurts our selfesteem. To deny or ignore is this natural triumph of our need for validation over the lessons from examining what we did wrong.
We may decide to think about our mistakes sometimes, but that process taxes our brain and cognitive system. We suffer from what behavioural scientists call confirmation bias. We process selectively. We look for what we already know, quickly draw conclusions from a few data points, arrive at a conclusion that confirms our beliefs, and move on.
A long-time reader of this column is an avid day trader. He has lost money, significant amounts, several times. He has also made money when his calls go right. Whenever we talk about it, he discusses how he got it right, and I point out how he got it wrong. The single most important reason he loses is because he fails to sell a losing position fast enough. He is biased by his sense of control over events. He prefers to book profits periodically, with a target in mind. That makes him feel in control and successful. The books can ask him to allow profits to run and cut losses, but he is tuned to do exactly the opposite. He knows his mistake well enough to laugh about
