Psychological biases and mental errors, as they apply to investing, are studied in a field known as behavioral finance. I find behavioral finance to be a fascinating area of study. I have recently mentioned some of the common mental errors in some of my articles on Seeking Alpha. In particular, I noted that I thought many of the people who are invested, both emotionally and financially, in the shale boom may be operating with confirmation bias. Of course, various discussions and comments by readers were sure to follow. At some point over the last couple of weeks, it dawned on me that confirmation bias is basically misplaced faith. God has designed us to put our faith in him. When we put our faith anywhere but him, we are operating outside of our intended design. We are then basically akin to a computer that is malfunctioning. But before I go any further, let’s get clear about what confirmation bias is.
Rather than trying to define confirmation bias for readers, I thought I would let someone who has expertise in the area explain it. Kendra Cherry writes that confirmation bias is “a type of cognitive bias that involves favoring information that confirms previously existing beliefs or biases. For example, imagine that a person holds a belief that left-handed people are more creative than right-handed people. Whenever this person encounters a person that is both left-handed and creative, they place greater importance on this "evidence" supporting their already existing belief. This individual might even seek out "proof" that further backs up this belief, while discounting examples that do not support this idea.
Confirmation biases impact how people gather information, but they also influence how people interpret and recall information. For example, people who support or oppose a particular issue will not only seek information that supports their beliefs, they will also interpret news stories in a way that upholds their existing ideas and remember things in a way that also reinforces these attitudes.”
Though I do find the field fascinating, I am no psychologist. But it seems to me that confirmation bias is related to a concept known as cognitive dissonance. In order to avoid cognitive dissonance, human beings will seek out information which confirms their existing beliefs. You can see how it would be useful for investors to understand and practice awareness of these faulty human tendencies.
But, is confirmation bias an inherent weakness, or is it a strength that is being directed toward the wrong object? You see, faith is something that must be practiced. We have to walk daily in faith. The Bible tells us in Philippians 4:8-9:
“Finally, brothers and sisters, whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable—if anything is excellent or praiseworthy—think about such things. Whatever you have learned or received or heard from me, or seen in me—put it into practice. And the God of peace will be with you.”
You might be thinking, “Wait a second, I thought faith was a gift from God.” You would be correct:
“ For it is by grace you have been saved, through faith—and this is not from yourselves, it is the gift of God— not by works, so that no one can boast.” – Ephesians 2:8-9
It’s possible there are different interpretations, but I think that scripture is telling us foremost that we are saved, not from good works, but from our faith. However, even faith is a gift freely given by God! We have no pedestal from which to boast. We are rebellious, sinful human beings who have been freely given what we did not deserve – eternal life, and reconciliation with our creator!
Now, if you’re getting confused about whether faith is a gift or some kind of skill we develop, let me just pose a couple of questions. Is Lebron James naturally gifted? Does he still have to use his gift each day if he expects it to work at an optimal level?
Faith grows as we exercise it. We do that by ignoring all of the worldly voices and listening to our Creator instead. We are supposed to ignore everything that contradicts the word of God. We are supposed to ignore anything that is trying to introduce doubt and fear. We are supposed to hate what is evil, and cling to what is good. We are created to follow our Creator! We are designed with the need to actively put our trust in Him!
But even in the Garden of Eden, there was another voice. There was a voice that introduced doubt, greed, and pride. The human beings were supposed to ignore that voice. They were supposed to recall what their Creator had said to them, and trust that it was true. They failed. We’ve been failing ever since then.
We are naturally sinful, weak, rebellious children who doubt and criticize and even blame our Creator. However, we are called to overcome those natural tendencies. We are called to put our faith into God. We do that by making a decision to trust in him. We do that by trusting in the sacrifice that his son made for us on the cross. Then we put it into practice daily. We listen to the voice of truth. We cast aside all other voices. This is what we are designed to do.
When we put our faith in ourselves, our own abilities, our wealth, in man-made theories, institutions, technology, or ideas, our faith is misdirected. It’s supposed to be directed toward our Creator. Instead, it is malfunctioning. It is not being used according to its design. What should we expect the results of such faith to be?