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4. Confirming-Evidence: Seeing What You Want to See

Suppose the stock market has gone too high and you've decided to sell most of your portfolio and invest the cash in a bank deposit. But before you call your broker, you decide to do one more thing to check the wisdom of selling. You call a friend, who you know sold out his portfolio last week, to find out his reasoning.
He presents a strong case for a definite market decline. What do you do?

You may not let that conversation be the final point, because you've probably just fallen into the confirming-evidence trap. This trap leads us to seek out information that supports our existing instinct or point of view while avoiding information that contradicts it. The confirming-evidence trap not only affects where we go to collect evidence, but also how we interpret the evidence we do receive, leading us to give too much weight to supporting information and too little to conflicting information. Suppose you had read an article on the stock market advising people to sell in an investment magazine, for example you would have tended to be less critical of arguments in favour of selling stock and more critical of arguments in favour of remaining in the market.

There are two fundamental psychological forces at work here. First is our tendency to subconsciously decide what we want to do before we figure out why we want to do it. Second is our tendency to be more engaged by things we like than by things we dislike. Naturally, then we are drawn to information that confirms our subconscious leanings.

5. Framing: Posing the Wrong Question

Imagine that you are richer by Rs. 2 lakh. Suppose you get two options -
a) Receive Rs. 50,000, or
b) A 50% chance to win Rs. 1 lakh and a 50% chance to win nothing.

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Prof. Gangineni Dhananjhay is Assistant Professor - Finance in the M.B.A. Department at Vivekananda School of P. G. Studies, Hyderabad.