Confirmation bias is the tendency of noticing information that affirms your beliefs and ignores contrary information.
A good example of confirmation bias is when an investor researches about a product category after he has formed a positive opinion about it. He is more likely to read articles, which validate his point of view.
This bias can be damaging when it comes to making financial decisions. That’s because people in the grips of confirmation bias truly believe that they are making an informed decision and they don’t realize that they are skewed by their own preconceptions.
We spoke to a few advisors to understand how advisors deal with clients falling prey to conformation bias.
K. Shobana, Aditya Capital Market, Chennai
Before coming to individual MFDs, many clients seek advice from their friends and relatives.
I remember a few years back, I had a client who came to me to invest in a sectoral fund. His friend had recommended him this scheme and he had done a lot of research on internet about the benefits of investing in that sector.
I reminded him that sectoral funds did not match up with his risk appetite. Further, I shared some research reports, which talked about how other sectors could be promising in the current market scenario to make him realise why a diversified portfolio makes sense. Finally, I shared historical data points to highlight performance of the sector across market cycles to help him take informed decision.
Suresh Sadagopan, Ladder7 Financial Advisories
A few years back, I met a client who sought my opinion on a close end equity NFO. He referred to an article in a leading newspaper on why the particular fund had the potential to deliver healthy returns in three year.
It is better to counter conformation bias with facts. Hence, I took some time to collect articles highlighting pros and cons of close fund funds. In the next meeting, I told him about confirmation bias and shared these articles.
I told him that he could achieve his target with open-ended equity funds too. In addition, I made him understood that close end funds come with high TER and are usually sold by distributors for better commission.
