Belief Perseverance, and Why Our Own Biases Hurt our Stock Picking Abilities
Believe perseverance is very similar to how it sounds, and it is essentially looking in seeking out things that confirm one’s own beliefs. To give an example of this, let’s say you are a strong, alt left democrat and that you want to google information about a certain specific candidate. Belief perseverance basically says that you are more inclined to not only search for, but also believe, accept and understand information that confirms your own beliefs. So if you think Obama is a good guy that is trying to help people, you’ll tend to seek out articles about that and take them as fact. If you are alt right and think Obama is a crook etc, then you’ll tend to seek out and believe that etc. just to give an example of this basic human bias. Take this same natural human tendency of belief perseverance, and turn it into an investment plan, and you’ve got a recipe for disaster, this blog post will tell you exactly why, as investing can very quickly turn into confirmation bias at its highest peak! For more information, subscribe to our blog or comment down below with your thoughts and opinions, and we’ll get back to you within one business day with a response.
So Here’s Why This Gets Dangerous From a Finance Perspective
So, here’s why this gets dangerous from a financial perspective. Say you make a lucky trade, you purchase the Snapchat IPO, where you think that the price will go up because Evan Spiegel has just reported he’s seeing huge earnings, and not its on literally every single news and finance blog out there, being reported day after day. Your neighbor is buying the Snapchat IPO, your best friend is doing it, even your wife said she is sinking her inheritance into it! So you figure…of course from your massive powers of deduction, that you can’t lose with snapchat! You put $10,000 in cash on it, and by days open, the stock is up 25%, you add another $15,000, and the next day its up 10%, you make a total gain of nearly 40% of your cash, and now you feel you are a trading phenom. You think that just because you called out the trade, that you are an investment guru, and that you cannot lose, when really, what happened was that you got LUCKY! Which does happen from time to time in the market, especially when you have a huge volume of people taking very high stakes risks.
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How I Have Fallen Prey to Belief Perseverance and Confirmation Bias in My Own Trading Career
I once built an online business that grossed around $300,000 in a span of 18 months, and from here, proceeded to continue reinvesting profits back into the company, only to watch what could’ve possibly been $100,000 in after tax profits, be swallowed whole by poor financial management issues, a low return on ad spend, and just pure laziness and lack of planning. Beyond that, if you’ll notice, this website called Inflation Hedging.com, is another website that I’m running right now, nearly 5 years later, so I can’t stop, I’m hooked, and as much as I’m doing it because I absolutely love writing, blogging, and SEO, as well as analytics (for some strange reason,) part of the reason is that I think that at some point down the road, I am going to replicate that euphoric high of having a start up company generate $100,000 in income! Even though in the fore front of my mind, I know that it will not happen, that it cannot happen, and that it will never happen! Especially when we’re talking about a Finance niche that is hyper competitive. End rant. But with this in mind, confirmation bias can turn good luck into bad luck, and can make you think that where you were once very very lucky, that you were very very skilled, when really, nothing but the total opposite is the real case and point.
Final Thoughts on Belief Perseverance, What it Is As a Whole and How You Can Avoid It
In summary, belief perseverance is a very important thing to avoid when trading stocks, or better yet, when investing, and it is one huge reason why I generally do not recommend trading stocks actively, in that it is lose lose, 90% of the time, your investments will fail, and beyond that, if you do succeed, it could screw up your long term discipline needed for real, long run rates of return in the stock market. Be smart, avoid cognitive biases, and diversify in full!
Cheers!
*Inflation Hedging.com
Sources:
https://money.cnn.com/data/markets/
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