How Psychology impacts our trading decisions - Confirmation Bias

The Football Index stockmarket is driven by people's choices and people's choices are driven by their psychology.

Having recently read The Undoing Project, The Signal and the Noise, Nudge and Thinking Fast and Slow, I feel compelled to share some of the interesting cognitive biases that I have come across and how we can overcome psychological biases and improve our trading on Football Index.

I am far from a psychologist and I am sure many members of FIC will have already read the above and other interesting books on psychology etc. But hopefully these blogs, which will be focusing on the psychology of trading within a Football Index setting, will be a useful addition to the usual Football Index Club content.

Confirmation bias

Confirmation bias is the tendency to search for and recall information that supports and confirms your pre-existing opinion. For example, a person may cherry-pick information or data that supports their belief, whilst ignoring what does not support their belief.

Interpreting new information

Let's start of by looking at how holders/non-holders could be influenced by confirmation bias when reacting to Borussia Dortmund's sporting director saying that Jadon Sancho will remain at Dortmund.

The reality is that there are a range of alternative scenarios which could take place if Jadon Sancho was to remain at Dortmund. The key is to attempt to make an objective, balanced assessment when reacting to new information and to avoid only considering what supports our prior viewpoint.

*This example works on the assumption that Jadon Sancho remains at Dortmund. It is worth pointing out here that Jadon Sancho could still move, despite the words of Dortmund's sporting director (Though this opinion is likely to be echoed by Sancho holders in particular, possibly due to confirmation bias).

Considering context

Confirmation bias may influence a trader's opinion when considering PB scores.

If holding Sancho, you may look at his peak PB scores of 316 and 313 and conclude that he is very likely to earn match day dividends often in the future, whilst ignoring the unsupportive fact that these scores were against the bottom 2 sides in the Bundesliga.

To avoid confirmation bias, it can be useful to have a look at a player's form throughout a full season and the context to how a player previously hit or failed to hit high PB scores.

Below are previous blogs on the context of PB scores:

Watching games

Our unconcious often filters information depending on how valuable we perceive it. We may recall what we subjectively view as valuable but neglect what we subjectively view as useless.

To some extent, this can lead to us focusing on the positive or negative actions of players (Depending on our prior judgement on the player). If we view positive actions of the player more valuable because we hold the player, we could become blind to the poor parts in their play.

For example, earlier in the season I noticed some holders of Andre Silva (Eintracht Frankfurt's forward) who had watched him play that day talk him up on social media because he had scored.

My perception of Andre Silva was different to another trader's due to confirmation bias

Having just finished watching the Frankfurt game myself, I found this interesting becasue he had actually missed 3/4 sitters and other than one tap-in, he had not played particularly well.

Perhaps, as a non-holder of Silva I was slightly bias against him because of my pre-existing opinion that he is not a particularly strong hold for matchday dividends. Either way, this served as a good example of how judgements on the same player can vary when watching games, depending on our pre-existing opinion on them due to confirmation bias.


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