We all have a natural instinct to protect ourselves from admitting we’re wrong.

Whether we make a mistake that hurt someone, cost us money, or just made us look foolish, saying, “I messed up,” doesn’t come easily to us.

In fact, the bigger the stakes, the harder it is for us to face our mistakes head-on. In such situations, we go into a defense mode, trying to justify what we did rather than accept the truth.

What’s worse, even when we’re presented with solid evidence that we’re wrong, most of us don’t back down. Instead, we double down. We find new ways to explain why we’re still right or why what we did made sense at the time. Even plain, irrefutable facts don’t always break through our shield of self-justification.

Take the example of a former American President. During the Iraq War that started in 2003, he became the poster child for refusing to admit his mistakes.

He insisted that Iraq had weapons of mass destruction, but none were ever found. He claimed its leader was connected to a terrorist organisation, but there was no credible link. He thought Iraqis would celebrate American soldiers, but instead, the invasion led to chaos and violence. And, of course, there was that famous “Mission Accomplished” banner while he was delivering a speech in 2003 on how the war was over and America had won, when the war was just getting started (it went on till 2011).

Even as things went wrong, he stuck to his narrative, refusing to admit for once just how flawed the original plan had been. He and his team brushed aside dissenting voices and contradictory evidence. After all, once you’ve decided the enemy has WMDs, every piece of intelligence that points in that direction feels like “proof,” while anything else is conveniently dismissed.

The war cost trillions of dollars, killed around 200,000 Iraqi civilians, destabilised the region, and tarnished America’s credibility on the world stage.

And the root of it all? Not the US President, but a deeply human tendency to favour evidence that supports what we already believe while ignoring or downplaying evidence that contradicts it, even when the consequences are expected to be terrible.

This is “confirmation bias” in action, the subject of today’s edition of this series on the psychology of investing.

In simple words, confirmation bias is like wearing special glasses that only let you see what you want to see. When you believe something, your brain naturally looks for information that proves you’re right and ignores anything that suggests you might be wrong.

For example, if you believe that eating only organic food is the best way to stay healthy, you’ll probably notice articles and stories about how organic food has fewer pesticides or is better for the environment. But if you come across studies or experts saying there’s little difference between organic and non-organic food in terms of nutrition, you’re likely to dismiss them or not even read them.

Or imagine you strongly support a particular politician. When they make a great speech or pass a popular law, you proudly share it on social media and say, “This is why they’re the best!” But when they’re caught in a scandal or make a mistake, you quickly defend them by blaming the media, their opponents, or a “conspiracy.”

Meanwhile, when an opposing politician makes a mistake, you call them unfit for office. But if they do something good, you barely notice—or write it off as luck.

That’s confirmation bias. Your brain is working overtime to make your side look better and the other side look worse, even if the facts don’t always line up. It’s like playing referee in a game where you’re clearly rooting for one team.

Now, confirmation bias isn’t limited to world leaders or politics or your choice of food. It’s something we all grapple with in our daily decision marking—especially when it comes to investing (since this is an article about investing, I confirm that this bias is especially seen in investing!).

Let’s understand more about how this bias hurts us in investing.

How Confirmation Bias Shows Up in Investing

Confirmation bias shows up in all kinds of ways when we invest. Here are just two examples:

1. “I love this stock”: Imagine you’ve done weeks of research on a promising company. You buy the stock and watch it climb, confirming that your initial judgment was sound. Then, one quarter, the company reports a disappointing earnings result because of a fundamental change in the industry landscape. While one quarter doesn’t make or break a business, if you’re prone to confirmation bias (all of us are!), you’re likely to ignore the bad news as a temporary setback, holding on even as negative signs mount. It’s the classic case of “marrying a stock”—becoming so emotionally attached that we fail to see when it’s time to part ways.

2. “This social media influencer cannot be wrong”: Today’s world is filled with financial “influencers” and Twitter stock-pickers. When a well-known investor or influencer talks (and talks, and talks) about a stock, their followers often cling to their endorsements, especially if the stock idea aligns with their preconceived beliefs. This creates an echo chamber effect, where the same positive attributes get repeated and amplified, while risks are downplayed. Investors end up blinded by the success stories of those who bought in early, without recognising that the stock’s fundamentals might no longer justify its price.1.

Why This Bias Hurts Your Portfolio

Confirmation bias can seriously hurt your returns. Here’s how:

• You hold bad investments too long: When you ignore red flags, you end up holding onto a bad investment way past the point where you should’ve sold.
• You miss better opportunities: If you’re too focused on one stock or sector, you might miss out on other great opportunities.
• You overestimate your abilities: Confirmation bias feeds overconfidence, making you believe you’re better at picking stocks than you actually are. This can lead to taking bigger risks than you should.

On top of the financial damage, this bias can also mess with your mental state. Daniel Kahneman and Amos Tversky, who studied how people make decisions, showed that cognitive biases like this one can pile on stress, especially when your investments aren’t going your way.

Researchers in decision-making have demonstrated that cognitive biases can amplify stress, particularly when investments aren't performing as expected.

How to Fight Confirmation Bias

So, how do you avoid falling into this trap? Here are a few ways:

• Look for the other side: Seek help from an advisor, or actively seek out opposing views. If you’re bullish on a stock, read the bear case. It’s uncomfortable, but it’ll make you more objective.
• Set rules for reviews: Schedule regular check-ins with your portfolio and reassess your investments based on facts, not emotions. ‘Buy and hold’ doesn’t mean ‘buy and forget’.
• Focus on data: Stick to hard numbers like earnings and cash flow instead of relying on opinions or gut feelings.
• Diversify adequately: By spreading your investments across different stocks and sectors, you avoid putting all your eggs in one basket—and getting too attached to any one stock.
• Keep a decision journal: Write down why you bought a stock and what risks you considered. When things don’t go as planned, revisit your notes. It’ll help you spot patterns in your thinking.
• Be open to being wrong: Even the best investors admit when they’re wrong. In fact, it’s crucial to recognise mistakes and change course.

In the end, confirmation bias is like a relic from our evolutionary past—a shortcut that once helped our ancestors survive but now often trips us up. In investing, it clouds our judgment and keeps us attached to bad decisions.

But recognising it is the first step. Every time you’re about to make an investment decision, pause and ask yourself: “Am I looking at this objectively, or just trying to prove myself right?”

Seeking the truth—even, and especially, when it’s uncomfortable—can be the difference between an average investor and a great one. Because while it feels good to be right, it’s far better to actually be right.

Investing isn’t about always knowing the answer; it’s about learning to ask the right questions. Start there, and the rest will follow.

This article is authored by Vishal Khandelwal of safalniveshak.com, an initiative to teach investors how to make simple and wise investment decisions.