How does confirmation bias impact investment strategies?

Confirmation bias occurs when investors favor information that aligns with their pre-existing beliefs while disregarding data that may contradict those beliefs. This cognitive bias can significantly influence investment strategies by causing individuals to hold onto losing investments longer than they should. When investors have a belief that a particular stock or asset will eventually increase in value, they may only seek out information that supports this hypothesis and overlook evidence suggesting that the asset is not performing well.

This tendency can lead to detrimental outcomes for their portfolio, as they may fail to act on signals that indicate it is time to exit or reduce their position in a losing investment. Consequently, confirmation bias can obstruct rational decision-making and contribute to poor financial outcomes.

In contrast, a balanced view of investment data, the encouragement of diversification, and objective analysis rely on objectively weighing all relevant information, which is compromised when confirmation bias is present.