My goal on “second Mondays” is to provide quick information on a behavioral bias that might help you with choices you make in your professional, personal, and financial life. A study has shown that when financial professionals received information on these biases, their performance improved. Here’s hoping this can do the same for you!
Confirmation Bias: A type of selective perception that emphasizes ideas that confirm our beliefs, while devaluing whatever contradicts our beliefs.
In this series, we’ve covered cognitive dissonance and conservatism bias, and confirmation bias is similar in our preference to stick with previous information. An interesting point is that the confirmation we seek can sometimes be very uncomfortable for us – it might mean that we continue to think other people mean us harm, or that life will be worse for us (have you heard about inflation lately?). We crave to be right so much (and so dislike being wrong), that we are willing to look forward to actual personal harm rather than admit fault. We are strange creatures!
One great example of this is employer stock concentration. I am fortunate to have worked on several projects with ExxonMobil during my career, and I know several people that work there. The company’s stock has strong connection with shareholders. However, since the summer of 2014 until October 2020, the stock price decreased by roughly 66%. During that time, the most common refrain I heard from shareholders that continued to hold their shares was, to shorten the conversation, “But the dividend!” As the stock price went down but the dividend paid per share stayed the same, the dividend yield (percent of share price paid out as dividend) went up. In the 13 months since then, the price has gone up 83%. You aren’t going to believe this…but I haven’t heard anyone bemoan the drop in their dividend yield per share. If the reason they were being complacent about the stock price going down was that the dividend yield was increasing, then the stock price increasing should have caused them discomfort. It didn’t, because the stock price and the dividend yield weren’t the point – they wanted to hold on to their stock and they wanted to believe that ExxonMobil was still a good stock to hold.
Thought Experiment for This Week: What is an example of confirmation bias in your life that you can review this week?
I hope this can help you make better decisions this week! Thanks for reading.