Confirmation bias
The tendency to hunt for information that supports a view an investor already holds, and to read new information as confirming it, rather than testing the view itself.
In plain language
Most people like to think they weigh the evidence and then decide. Confirmation bias works the other way round.
An investor decides first — often on a hunch, or a tip. Only after that does the search for information begin. And the search is not neutral. It looks for facts that back the decision already made, and it reads doubtful facts as if they backed it too.
The risk is the same as with the availability heuristic: real risks get missed. But the mechanism is different. Availability heuristic decides what an investor notices. Confirmation bias decides what an investor believes once he has noticed it.
How it works
This is the second of the seven behavioural biases the workbook lists in Chapter 1, section 1.6. The workbook's own description: investors look for additional information that confirms their already held beliefs or views, and interpret new information to confirm those views — deciding first, then looking for data to support the decision.
The workbook links the downside to the same one as availability heuristic: investors "tend to miss out on many risks." Confirmation bias compounds over time, because every piece of supporting information reinforces the original view, while contrary information is discounted or ignored — so the conviction grows even as the actual case for it does not.
A worked example
Illustrative — the workbook names the bias but does not work an example.
Priya buys Rs 2,00,000 of a mid-cap fund because a colleague made money in it. Over the next year, she reads three articles calling mid-caps "the place to be" and shares them in her family WhatsApp group. She skips an article warning that mid-cap valuations are stretched, dismissing it as "too cautious."
She adds another Rs 1,50,000 on the dip that follows, telling herself it confirms her original view — the fund is "on sale." She never revisits whether the original decision was sound; she only collects reasons that it was.
Why NISM asks about it
Chapter 1 (Investment Landscape), section 1.6, covers confirmation bias directly after availability heuristic. A question is likely to describe an investor who seeks out only supporting views after a decision is made, or who reinterprets a warning sign as good news, and ask which bias that is.
Common exam traps
- The order matters: decide first, then search. That sequence is what marks this out as confirmation bias rather than ordinary research.
- Not the same as overconfidence. Overconfidence is trusting one's own judgement too much; confirmation bias is selectively feeding that judgement with agreeable evidence.
- Confirmation bias and herd mentality can look similar — both lead an investor toward the crowd's view — but herd mentality is about following others, while confirmation bias is about filtering information to protect a view already held.
Where this is taught
Free preparation for NISM Series V-DRelated terms
- Herd mentalityThe behavioural tendency to follow what other investors are doing rather than one's own analysis — often profitable to resist, since going against the herd has repeatedly been the more rewarding strategy.
- Loss aversionThe behavioural tendency to prefer avoiding a loss over acquiring an equal gain — it is better not to lose Rs 5,000 than to gain Rs 5,000 — which keeps investors out of sound opportunities.
- Availability heuristicThe habit of judging an investment by whichever example comes to mind fastest — a friend's tip, a headline, an advertisement — instead of by actually researching it.
- Redhead conditionsKeith Redhead's (2008) list of 5 conditions that make a speculative bubble more likely to emerge — inexperienced traders, high valuation uncertainty, asymmetric payoffs, easy borrowing and difficult short selling.