Our friend Hassan reads economic newspapers, websites and TV programs every day to keep track of the stock market conditions. All he reads and hears about is the boom in the economy and the rise in the stock market. Based on his belief that the market is taking an upward trend, Hassan started to invest in the company's share.
At the same time, Hassan begins to read the reports of the brokerage firms that made "Buy" recommendations for the company "S" shares with confidence and enjoyment. When it comes to some news and reports that the stock "X" is overvalued, it taps the facts and explains the excessive price of the stock as a reflection of the good performance of the company's management.
"Hassan" asks others about their opinion of the company "Q". If they agree with him and talk positively about the company, talk to them in more detail, but if they disagree with him and have a negative view of the company, Another shared his views on "X".
"Good" ignores all cautionary signals pointing to the direction of the "X" to the downside, but the strangest is that when the stock price continues to fall steadily, the "good" mind tends to fall back at a time when the share price is flourishing and believed That the arrow has already reached the bottom and is now preparing to restore its former glory.
The stock lost 5%, became 10% within days before its loss reached 25% by the end of the month, and Hassan stuck to it and did not want to abandon it. After several months it lost almost all of its money because it was the victim of a trap where most investors "Confirmative bias". Hassan looked only at the opinions and evidence that supported his decision to invest in S. and ignored all evidence that questioned the validity of his decision or the feasibility of his investment.
"Confirmation bias" is a psychological phenomenon that explains why we tend as human beings to search for information that confirms our current views and beliefs while ignoring those that may refute these views and beliefs.
Quite simply, many of us tend to prefer information that confirms their ideas or assumptions, regardless of the validity of this information.