Avoiding Confirmation Bias in Investment Decisions: A Value Investor’s Perspective
The Silent Killer of Rational Investing
According to Daniel Kahneman, your brain doesn’t just process information—it builds stories. And once that story takes hold, every new observation bends to fit the narrative. This is true in all aspects of life, but in investing, it can be financially devastating.
You think you're too smart to fall for it? So did the hedge funds, banks, and billionaires who handed Bernie Madoff their fortunes. They saw what they wanted to see: steady, market-beating returns with no volatility. Red flags? Brushed aside. Their elite status and inside connections convinced them they had an edge. But confirmation bias doesn’t care about your pedigree—it blinds you to reality. By the time the truth emerged, $65 billion had vanished. If the best and brightest can be fooled, what makes you think you’re immune?
Confirmation bias is one of the most dangerous psychological traps in investing. It subtly warps your decision-making, making you seek out, interpret, and remember only the information that supports what you already believe—while ignoring everything else. It’s not just dangerous; it’s portfolio poison.
For value investors, this bias is particularly insidious. It can lead to overconfidence, ignored risks, and poor performance. If left unchecked, it turns the discipline of value investing into a self-fulfilling prophecy of selective thinking—where you’re not analyzing a company, you’re just convincing yourself you’re right.
Over the years, I’ve developed my own safeguards against this trap. One of them? I never act immediately on my analysis. I force myself to “sleep on it,” to revisit my assumptions with fresh eyes, to test whether I’m seeing the truth—or just what I want to see.
This article will show you how confirmation bias sneaks into your investing process, how it can quietly destroy your portfolio, and—most importantly—how to fight back. Because in this game, the only edge that matters is seeing reality as it is—not as you wish it to be.
What Is Confirmation Bias? The Invisible Trap in Your Investing Process
Let’s start by looking at what confirmation bias is and how it works. Confirmation bias is the tendency to favor information that confirms pre-existing beliefs while disregarding or downplaying opposing viewpoints.
You have heard the phrase “do not fall in love with a stock”. This refers to many (actually, most) investors’ inability to comprehend any information that goes against what they believe to be true.
Take TSLA 0.00%↑ today for example. Its sales are falling 20% - 60% YOY all over the world. It had a revenue of $98B in 2024 compared to $185 B revenue Ford F 0.00%↑ had last year. Tesla has a market capitalization of $1.1 Trillion while Ford’s market capitalization is at $36 Billion. Tesla stock trades at 162 P/E while Ford stock trades at 6 P/E.
When I run a poll on Substack Notes or BlueSky asking for people for their best stock idea for next 10 years, I am surprised at how many people tell me it is Tesla.
This is confirmation bias in action. No manner of logic and facts will sway these investors from their position.
Why It’s Dangerous for Investors
It creates a false sense of security, leading to poor decision-making and overconfidence in a flawed thesis. If I were a betting man, I would bet on Ford still being around in 10 years but I will not take the same bet for Tesla.
How It Affects Value Investors Specifically
Many value investors pride themselves on contrarian thinking but may unknowingly reinforce their biases by cherry-picking information that aligns with their investment ideas.
Sometimes I am quick to judge a negative article as uninformed. In those cases I withhold action and let things simmer for a while. I may be right or I may be wrong but I give myself time to understand my position. Within a day or two, I will make a call and move on. I find that this extra time lets me work out problems in my thesis.
Real-World Examples of Confirmation Bias in Investing
Understanding theory is one thing, but seeing how confirmation bias plays out in real investing decisions will make it more vivid to you.
Example 1: Holding on to Losers Too Long
Suppose you invested in a stock because you concluded that it was undervalued. Then the company reports a decline in earnings, and this you had not anticipated in your original thesis. Instead of reconsidering, you may chalk this up to “short-term headwinds”.
You may even search to see what other investors are saying. Without fail you will find commentary supporting either position. There will be people who support your position and there will be others who oppose, but if the human psychology is any guide, you will find people who take the same position as you do more credible.
Portfolio Impact: Leads to value traps, where you remain invested in fundamentally weak companies due to an unwillingness to accept a mistake.
Example 2: Trusting the Wrong Sources
I had a very bad habit of reading the message boards for the stock that I am invested in. I used to get riled up when I found people who “just do not understand”..
If you own the stock, every bullish message confirms your thesis and strengthens your conviction. Every dissenting message is ignored.
Portfolio Impact: Creates an echo chamber, preventing you from objectively assessing risks.
How Confirmation Bias Can Hurt Your Portfolio
Confirmation bias isn’t just an abstract concept—it has real consequences that directly impact your returns. You will feel the effects in few different areas in your portfolio.
Poor Risk Management
You ignore the red flags and you will end up holding the stock to the bitter end. It is very common to turn a profitable position into heavy losses because you would not pay attention and sell when there were a number of signals telling you to do so.
Overconcentration in Specific Ideas
As value investors we think in terms of, “if this was a good value then, it is an even better value now” when the stock goes down. This may be true, or in many other cases, this may be just a good stock gone bad.
But think of what happens when you believe that this stock is even better value now. You will likely double down on that stock and put more money into it.
You will end up over concentrating in the wrong stocks that will lose you money, just because you ignored the available evidence due to confirmation bias.
Missed Opportunities
This can be due to one of the two possible reasons:
Because you are fixated on being “right” about a stock that you own, you are blind to better opportunities elsewhere, and,
You have specific ideas ingrained in your mind about certain companies/sectors or industries, and you fail to capitalize on opportunities that may arise
Missed opportunities do not seem tangible as you are not actually “losing money”. However, opportunity cost is a real cost in your portfolio and it results in a sub-par performance over a period of time.
Strategies to Avoid Confirmation Bias in Your Investing Process
Awareness of confirmation bias is the first step, but actively countering it requires discipline. I mentioned the trick of “sleeping on it” to give your subconscious some time to surface objections to the course of action you had planned. Here are a few more ideas on how to safeguard your decision-making process.
Actively Seek Dissenting Opinions
I do not wish to imply that you should avoid listening to other investors. Please do follow investors that have opposing point of view and who will challenge your thesis. Read the countering analysis. Invite skepticism.
One of the reasons I write this Substack is to get my analysis out in public. It helps me flesh out my arguments more completely when I have to actually put it on paper. It also helps to know that I am sending my analysis to 1000s of sophisticated investors who will tear it to shreds if I am not on top of my game.
You will make mistakes and I do make mistakes often. But you will find that you will start avoiding many of the fatal mistakes that you would have made in the past. And that my friends, will give your portfolio a performance boost like no other.
Avoid Echo Chambers
Avoid the avenues of lazy research where lazy investors do their research. These include finance message boards, finance TV pundits like those on CNBC, Cramer, and any confirmation-seeking media that monetize their content with ads and sponsorships.
You should also avoid the wall street analysts whose firms have an investment banking relationship with the company whose stock you are considering. This is a walking talking conflict of interest, that sadly not many care about.
Do you really think an analyst will tell you to sell Tesla stock (used just as an example) when the firm they work with collects 100s of millions of dollars in fees annually advising Tesla on M&A, or underwriting their bond issuance?
Use a Pre-Mortem Approach
I am actually very fond of this approach.
I like to think of the worst case scenarios that could happen. What if this company lost favor and all the government contracts disappeared? What if the world moved to nuclear energy and fossil fuels were no longer an issue? What if new competition appeared that were more nimbler and had more home government support?
Of course, the scenarios will be different based on the stock you are looking at.
If you cannot find a reason to preclude you from buying the stock, go ahead and buy the stock. If you find any reason to make you stop, carefully think it over and decide whether it is an acceptable risk to take.
Implement a “Devil’s Advocate” System
This could be as simple as listing all the pros and cons of investing in this stock and then weighing them against each other. The trick is to put it down on paper (or your word processor). Anything that is just in your head could be easily forgotten.
This has the additional benefit of you being able to refer back to this list later to see how your assumptions are holding up. Sometimes over time you may find more cons to add, and that might tilt the balance in a different direction.
Let Data Drive Your Decisions, Not Emotions
When I make a recommendation, I do so based on a calculation of intrinsic value. My recommendations are never on the lines of “so many analysts rate this as buy … they seem to be gaining market share … etc.”
I fully understand that precision in investing doesn’t mean much.
But it helps me draw a line. And it helps me lay out my investing decision rationally backed with data.
And I can track this data (ratios, metrics, etc.) over time to see if my investment thesis is improving or going worse.
In absence of data, I will be investing on heresy. I would not invest like this and neither should you.
Establish “Bias Checkpoints” in Your Investment Process
If you have done everything correct, then you have data. lists of assumptions and checklists. Once every year or every few months you should review your investments to see if they still hold up.
You know that you should sell a stock at high. The problem is that most investors do not know when this “high” occurs. Every time a stock runs up, new investors come into the stock.
But you won’t fall into this trap since you will be working with data and checklists and you will not be swayed by the biases.
The Value Investor’s Edge: Rationality Over Emotion
At its core, value investing is about rational decision-making based on fundamentals. However, even the most disciplined investors can fall victim to confirmation bias. The key is acknowledging the risk, implementing systematic safeguards, and remaining intellectually flexible.
By actively challenging your assumptions, avoiding echo chambers, and letting data—not emotion—drive your decisions, you can stay ahead of the psychological traps that derail so many investors.
Final Takeaway: Your greatest advantage as a value investor isn’t just your ability to find mispriced stocks—it’s your ability to remain objective when others succumb to their biases.
The most effective strategy for me to combat confirmation bias is to have the courage to consider opposing opinions and assess their merits. Additionally, besides confirmation bias, recency bias is another damaging psychological bias.