Confirmation Bias Definition Top 4 Examples In Business

Confirmation Bias Definition

Examples of Confirmation Bias in Business

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Example #1

Vivek is a long-time investor in the stock market. He invests by researching and screening the stock by himself. One of the stocks that he has recently shortlisted is Reliance Power, and he has learned about the firm’s bankruptcy and is considering selling the stock.

A few days later, a piece of news was published that Reliance power is getting help from a brother of the chairman of Reliance power and the firm is expected to revive. Still, however, Vivek prefers to avoid the information and looks for information that signs towards bankruptcyBankruptcyBankruptcy refers to the legal procedure of declaring an individual or a business as bankrupt.read more.

What kind of bias is Vivek suffering from?

Solution:

Even though Vivek has been a long-time investor in the market, when it comes to its view, he prefers to stick to that and look for the information that will confirm his view. As given in the example, the first created a view of selling the stock of Reliance Power based upon his initial view of bankruptcy. Later, when some positive news is published through which the firm can revive itself, he ignores that view and looks for other information which would confirm its existing view of selling the stock. Hence, this is a case of confirmation bias where the investor forms an initial thought and filters out information that supports their belief.

Example #2

John is the lead analyst of a multinational investment bankInvestment BankInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more. He is researching the macro markets and recently attended a seminar on market views for next year. He heard a renowned economist who published books on the macro market and stated a few facts like their slow growth in the market, which was witnessed in 2008, sales were falling, liquidity crunching cost-cutting by big firms. Hence, he created a view that next year could be a year of recession again. As a result, he publishes reports and releases to his client, starting to be cautious as a recession could be ahead soon and invest accordingly in debt securities and avoid equities for the time being.

After a few months, the world bank came with the data stating that a new trade treaty was signed between the US and China to cut import taxes and welcome globalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations.read more further.

One of the clients of John emails him asking whether he has revised his view?

John replies to his email stating that a deal signed doesn’t change the numbers, and there has been no progress in the market, and in fact, it was drowning more as per his more recent research.

Discuss the type of bias John is suffering from.

John first created an initial view of the recession based on his seminar’s information. i.e., sales were falling, liquidity crunching, cost-cutting by big firms, etc. However, when a big deal was signed between the US and China, he avoided that information and again looked for the information that confirmed his view and bias of recession. This is a clear sign that John is suffering from cognitive bias and confirmation bias as he is looking for only that information that supports his view and filtered out the information of the US and China deal.

Example #3

Josh William is a new doctor in the colony. He was recently visited by the famous actor Mr. Khan who came to him for a diagnosis. He had symptoms like headache, excessive sweat, and chills, but when he measured his temperature, he noticed that it was less than 100.40 F (38 C), and despite that, he concluded that he had been suffering from high fever since 3 out of 4 symptoms confirmed that he has a high fever. So after prescribing medicines the next day, he checked the body temperature, which was still below 100.40 F, and body skin was also not hot. Still, the doctor didn’t change his medicine.

Is the doctor suffering from any bias, and if so, kindly elaborate?

The patient was suffering from headaches, excessive sweat, chills, which are also common features of fever. Still, the doctor avoided major information that disconfirms his belief about fever, which is that the patient’s temperature was lower than 100.40 F (38 C). He avoided that information, and again the next day, he also observed that his body skin was not hot, and the temperature was lower than 38 C; still, he didn’t change the medication.

It suggests that he is suffering from cognitive bias. The type of cognitive bias that he is suffering from is confirmation bias. He only looks for information that supports his belief and avoids any information that disconfirms his initial view.

Example #4

Aditya, who has become a new investment advisor, is approached by his client Vijay to put his views on Walmart. Before Aditya can put his views, Vijay informs him about the way stock has been performing like very good YoY growth in EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more, EBITEBITEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more, and net profit, also growth in revenues, and the way the market has been perceiving the stock, which has already put the stock in premium. Vijay is interested in buying long-term and wants to create a concentrated position. However, after hearing Aditya state that Walmart has started more aggressive marketing and offering discounts now 7% from earlier 5%, which could impact their margins, Vijay avoids that information. Instead, he asks him to include the stock in the portfolio.

Again, here it appears that Vijay is suffering from confirmation bias as he ignores the critical information that could hamper Walmart’s margin and later impact the stock price.

Conclusion

It is one of the most common biases seen in the real world and day-to-day life, where people seek only evidence that supports their initial view and filter any information that would disconfirm their belief. To avoid such a situation, one should look for contrary advice, avoid confirming questions, seek more information, study the impact of the same and then act accordingly.