Stock Market · Mind over Markets

Confirmation bias

Confirmation bias is the brain's tendency to seek, interpret, and remember information that confirms what we already believe, while ignoring or dismissing evidence to the contrary. In investing, it's lethal.

How it shows up

You buy Reliance Industries. Now you:

• Read articles praising Reliance's growth strategy
• Notice tweets celebrating its quarterly results
• Dismiss articles questioning its debt levels
• Skip podcasts critical of Indian telecom margins

Your information diet becomes one-sided. You think you're 'doing research' but you're actually building a fortress of confirming evidence.

The contrarian thought experiment

For every position you hold, ask: 'What would have to be true for this investment to be a disaster?'

If you can't answer, you haven't done real analysis. If you can answer but immediately dismiss it as unlikely, that's confirmation bias.

> The discipline isn't 'find reasons not to buy'. It's 'genuinely understand the bear case before buying'.

Famous examples

1. Yes Bank investors 2018-2020: Bullish analysts kept defending despite growing red flags. Stock fell from ₹400 to ₹15.

2. DHFL: 'Government will save it' narrative persisted until insolvency.

3. Crypto bulls 2022: Dismissed fundamental questions about leverage. Lost 70%+.

Social media accelerates confirmation bias

Twitter, YouTube, WhatsApp groups create echo chambers. Algorithms feed you more of what you engage with. If you bullish-engaged with Adani content in 2022, you saw mostly bullish Adani content even as fraud allegations surfaced.

Defeating confirmation bias

1. Actively seek BEAR research on stocks you own

2. Follow informed critics, not just promoters

3. Read short reports (e.g., Hindenburg) for stocks you hold, even if you ultimately dismiss them

4. Maintain a 'kill criteria' for each position: what specific evidence would force you to sell?

5. Talk to people who disagree with you, and listen

Takeaway. Confirmation bias makes us seek evidence supporting our views and ignore contradicting evidence. Defeat with active bear research, pre-defined "kill criteria", and listening to disagreement. Always ask: "What would have to be true for this to be a disaster?"