INVESTING | Confirmation Bias
If you have never heard of either Flakey Jake’s or Sea Galley, there is a reason. One of my earliest investment experiences is a poignant lesson on the downside of confirmation bias.
In the early 1980’s, a new restaurant opened in my hometown. Flakey Jake’s was a gourmet burger place where you walked through their extensive toppings bar to assemble your own burger. My brothers and I loved going to Flakey Jake’s, and it quickly became our go-to for celebrations and events.
Flakey Jake’s was great; and based on my extensive market research that included asking my younger brothers and likely a few friends, I was convinced Flakey Jake’s was going to go big. I decided I wanted to sell my other stocks and buy Flakey Jake’s. After some relatively successful investment experiences, I was flush with confidence. Without the internet or more than a few TV channels, my research was based on my personal experience or what I could glean from the Wall Street Journal. I could read stock quotes, but as a 10-year old, I was not reading a lot of articles in the Wall Street Journal; so, I relied on my extensive life experience.
My father explained that Flakey Jake’s was not publicly traded, but that it was owned by another local restaurant named Sea Galley that was. I was not a seafood fan, so I had not been to Sea Galley, but if they were smart enough to own Flakey Jake’s, then they must be a good investment. So, I bought as many shares of Sea Galley as I could afford and sat back ready to reap the rewards of sound investment decisions and perfect market timing.
Apparently, I was wrong. A 10-year-old boy, his brothers, and his friends are not the best resource for picking stocks. I now work about a mile away from the Flakey Jake’s, so I am frequently reminded of how costly confirmation bias can be.
Simply, confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses. Confirmation bias, along with many other cognitive biases, is a terrible foundation on which to build an investment strategy.