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Beginner · Lesson 3 of 4Confirmation bias, anchoring and recency
Confirmation bias is seeking information that agrees with what we already think. Once we own a share, we notice good news and dismiss bad. Deliberately write the bear case before buying; Vestora's Risks tab and inversion checklist help.
Anchoring is fixing on an irrelevant number, such as a past high price or a round target. Recency bias overweights recent events: after a strong year, people expect more of the same; after a crash, they expect more crashes.
Charlie Munger popularised inversion: instead of asking how to succeed, ask what would guarantee failure, and avoid that.
Key takeaways
- Write the bear case before you buy.
- Past highs are anchors, not values.
- Inversion: avoid what guarantees failure.
Check your understanding
1. Which habit directly fights confirmation bias?
- Reading only bullish forums
- Writing the strongest case against your idea
- Checking prices hourly
- Buying more after rises
Show the answer
Writing the strongest case against your idea. It forces you to face the other side.
2. "It was $50 last year, so at $30 it must be cheap" is an example of...
- Diversification
- Anchoring
- Hedging
- Compounding
Show the answer
Anchoring. The old price is anchoring the judgement.
Go deeper
- Wikipedia: Confirmation bias
- YouTube videos: cognitive biases in investing anchoring recency
- Investopedia: anchoring bias
- Wikipedia: Anchoring effect
- Wikipedia: Recency bias
Practise this in Vestora
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