In the cold, hard world of business and finance, we as investors often like to think of ourselves as purely rational decision-makers. We just want to see the numbers. Show us the data, and then we’ll make our decisions. We can’t be fooled by touch-freely appeals to sentiment. When we’re in the process of making our investment choices, we just want the facts. We have no trouble whatsoever leaving our emotions out of it…or so we think.
Let’s go with another example—let’s talk about coffee. Are you a coffee drinker? Do you think coffee is good for you? Bad for you? Somewhere in between? You may not have strong feelings one way or another, but some people do. If you are an avid coffee drinker, perhaps you believe that is a healthy drink. You love it so much, and you don’t want it to be unhealthy. That being said, you’re a rational person and you want to make sure your passion for the beverage isn’t obscuring your judgment. So, you do some research.
When you Google “reasons why coffee is good for you,” you are immediately relieved. Article after article appears before you with headlines such as “9 Reasons Coffee is Good For You,” “11 Reasons Why You Should Drink Coffee Every day,” and “13 Health Benefits of Coffee, Based on Science.” Science. The word reverberates in your mind. You don’t even have to click through to read any of the articles. Clearly, the facts are on your side. Coffee is indisputably healthy. Facts don’t lie.
Here’s the question, though—what if you had instead searched, “reasons why coffee is bad for you?” Would you have gotten a blank page reading only “no results found?” I’m afraid not. If you had instead sought out information suggesting coffee is unhealthy, guess what? You would have found it. You would have stumbled across such headlines as “6 Reasons Coffee is Bad for You,” “9 Reasons to Stop Drinking Coffee Immediately,” and “Ten Reasons to Quit Your Coffee.” But you never came across any of these perspectives, because—if you were honest with yourself—you probably didn’t really want to hear them. Your real question wasn’t, “Is coffee good or bad for me?” Your real question was, “Is there information out there that can make me feel better about believing that coffee is good for me?”
We engage in this sort of confirmation bias in so many of our decisions throughout life, and we don’t even realize it. We do it when we’re making health decisions, decisions about our children, decisions about home improvements, and—yes—even decisions about investing. It is often the case that we already have our minds made up that we, for example, want to include a particular stock in our portfolio. Maybe we read a story about the company in the newspaper, or we saw a riveting speech from its CEO on YouTube. Whatever the reason, we feel compelled by the company so much that we want to invest in it.
We’re not suckers, though, are we? Of course not! We do our “due diligence” and poke around to find some more information on the company and its financials before making the investment decision. However, we’re already so enamored by the company that we gravitate more toward the positive coverage and tend to dismiss or downplay any mentions of its weaknesses. We think we’re making thoughtful, strategic, fact-based decisions. In reality, though, we’re simply looking for things that look like facts so we can use them to lend credence to our feelings.
Of course, making decisions based on data is important, but it kind of defeats the purpose when the data we use is based on our emotions. When you’re experiencing intense emotions in investing, the better thing to do is to let someone else do your research for you. Talk to a third party who doesn’t have a stake in the direction of your decision, like a financial coach, the opportunity to research the pros and cons of going one way or the other. If you’re stuck trying to make a decision on your investments and you need someone to help you sort the facts out from your feelings, just reach out to us for a complimentary consultation. We’ll do whatever we can to help you make the decisions that will improve your life in the long-run—regardless of how you feel about the decision in the heat of the moment.