“Belief is perception of masses”
Confirmation bias is about having a preconceived notion and looking for the evidences that support it and refuting the ones that don’t.
In other words, confirmation bias is a human tendency to look for facts and evidence that support our opinion and reject the ones that refutes them.
Let me share another experience of mine which happened few years ago.
I was researching about an auto ancillary stock, which was trading below its book value. Company was making decent profits with a Net Profit Margins of around 12%. Looking at the history of rising profits and stock trading at 60% its book value, I thought it was a great bargain at this price.
Few days later, on further analysis, I came across the fact that company had huge debt on its books, much higher than the total revenue of the company.
Being highly optimistic and biased about the stock, I rejected the warning sign and started buying the stock on every dip.
After few years, the margins declined, profit evaporated, debts soared, and stock price tumbled.
I suffered a loss as I was looking for evidences that confirmed my perception(such as rising profits, growth in auto sector, diversified portfolio of the company), and rejected the ones that did not (such as rising debt, declining margins).
That is how confirmation bias works. If an investor is optimistic about a stock’s future, he may look for evidences that confirm his perception, overlooking the evidences that present a different opinion.
This results in one sided view of the situation, leading to poor investment decisions.
The best way to overcome confirmation bias is to ask contradictory questions and analyze the facts that oppose our belief.
An investor must seek alternative ideas that challenge their point of view and make a list of pros and cons to reassess his analysis with an open mind.