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Be wary of this investor bias

Anthony Rayner, manager of Miton’s multi-asset fund range, says we must be wary of the influence of confirmation bias on investor and fund manager decisions

Human beings face an ongoing internal conflict between the head and the heart, between logical reasoning and emotions. Investors, at least human ones, face these same tensions. The impact of emotions, which can lead to unhelpful behavioural biases, can’t simply be cancelled out, but investors can look to recognise, understand and regulate their emotions.

One particular behavioural bias investors should be wary of is ‘confirmation’ bias. This is the tendency to search for information that confirms an existing opinion. It’s evident outside the world of investment too, most notably in scientific research.

Confirmation bias is becoming increasingly important as technology dominates media and as politics becomes more divisive. One of the impacts of technological advances in media is the growth of the ‘filter bubble’, which can protect us from views that are too dissimilar to our own. In addition to the filter set by the user, technology brings to the reader the news most ‘suited’ to them. It’s somewhat ironic that the immense power of technology is often reduced to an echo chamber for our own views.

Much of this gives the user the illusion of being informed but, partly through the power of confirmation bias, it’s largely false confidence. Arguably, the more inaccurate the story, the more likely it’ll go viral; as evidenced by the rise of fake news.

Of course, social media and the rise of divisive politics are related. It’s easier to hate online but also much easier to carry on believing a lie, rather than accepting you were fooled. It’s a populist’s dream, with complex multi-national and multi-lateral arguments distilled to one syllable sound bites: offering apparently simple solutions to complex problems.

So, what can we do as investors? The first step is to recognise how powerful the changes have been in media and politics. Political risk isn’t limited to a political event itself, the risk continues beyond the event.

If “confirmation” is not received through the event itself, it can be gleaned later through the market reaction and its evolving implications. For the EU referendum, sterling has been the main indicator for judging the impact of the vote to leave.

For most investors who took part in the vote, at least part of their perception of whether sterling will strengthen or weaken now is probably traceable to how they voted. For example, a ‘Bremain’ voter would likely have more sympathy for sterling to weaken, as this would validate or (confirm) their view.

Biases exist; they need to be considered and, where possible, diluted. This is an important part of our pragmatic approach to investing, as confirmation bias works directly against being pragmatic and open-minded. We search for information from multiple sources, including local sources, ensuring team members receive different research, and follow a disciplined strategy which can help to limit behavioural biases more generally.

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