The Effect of Confirmation Bias on Investor Decision-making and Profitability
Conference Year
January 2022
Abstract
Established investment theory assumes that the investor makes informed, unbiased, and well-judged decisions. However, studies in behavioral economics have illuminated that people are highly irrational. Among numerous, pervasive cognitive errors that impact decision-making is confirmation bias. This bias results from seeking information that solely reinforces one’s existing beliefs while avoiding contradictory facts. This attempt to maintain mental comfort leads to an inaccurate assessment of risk. Thus, a comprehensive literature review and meta-analysis of existing studies reveal that confirmation bias and related mental errors correlate negatively with investment profitability.
Primary Faculty Mentor Name
Michael J. Tomas III
Status
Undergraduate
Student College
Grossman School of Business
Second Student College
Patrick Leahy Honors College
Program/Major
Business Administration
Second Program/Major
Finance
Primary Research Category
Professional Studies
Secondary Research Category
Social Sciences
The Effect of Confirmation Bias on Investor Decision-making and Profitability
Established investment theory assumes that the investor makes informed, unbiased, and well-judged decisions. However, studies in behavioral economics have illuminated that people are highly irrational. Among numerous, pervasive cognitive errors that impact decision-making is confirmation bias. This bias results from seeking information that solely reinforces one’s existing beliefs while avoiding contradictory facts. This attempt to maintain mental comfort leads to an inaccurate assessment of risk. Thus, a comprehensive literature review and meta-analysis of existing studies reveal that confirmation bias and related mental errors correlate negatively with investment profitability.