Marisa Bell-Metereau* says confirmation bias is how we reinforce our choices by only seeking out the opinions we want to hear, which could spell trouble for financial decisions.
Picture this scenario: you’re trying to stick to a budget, but a group of your friends found a great deal for a long weekend getaway.
You decide that you do need to splash out on a fun beach vacation.
To justify this expense and make yourself feel better about abandoning your budget, you search the internet for articles about how time off is good for your productivity and mental health.
Even though you know should probably have saved that money for your rainy day fund or used it to make an extra payment toward your credit card debt, you rationalise splurging on a vacation instead because the information you find tells you that it’s okay to spend money on experiences, carpe diem, live a little!
Or maybe you’re tired of driving an ugly clunker of a car, even though it’s perfectly serviceable and totally paid off, and want to buy a new car.
You talk to your friend who is really into cars and hit up Google with queries like ‘Cars are a good investment’ and ‘New cars are safer than older ones’.
You gather some stats about how newer models are so much more fuel-efficient than the older cars on the road and think about how much money you’ll save on petrol.
What you find as you’re doing your research confirms it: you’re definitely making the best decision, even if it’s the more expensive one.
What is confirmation bias?
What you might actually be doing is falling prey to confirmation bias: a term used to describe our tendency to pay close attention to any information or research that confirms what we think (while ignoring anything that contradicts it).
Confirmation bias is often how we reinforce our choices, by only seeking out the point of view we want to see.
Why is bias a problem when it comes to money?
One of the problems with confirmation bias is that it’s often unconscious.
We create a little bubble by surrounding ourselves with people who think just like we do, so they’re not always in the position to point out a different perspective from ours.
Having friends who are similar to us isn’t a bad thing, obviously.
Our best friends are often people who share our hobbies, interests, and values – all major points that strong relationships are built on.
Where it starts to become an issue is when we make decisions, especially major financial decisions, based on advice that doesn’t take into account other points of view and with information that is too narrow in scope.
How do you get rid of confirmation bias?
So, what’s the best way to beat confirmation bias and keep it from sabotaging your finances?
Well, make sure to go beyond your echo chamber and find arguments from the other side of the subject, whether that’s personal finance, relationships, or even career advice.
If you’re absolutely convinced that you’re right, there’s no harm in seeing what someone else has to say about the matter, right?
For example, maybe you want to scale up your photography hobby into a side job – shooting weddings and doing family photos on the weekends for extra money.
When you talk to your friends and family about this exciting idea, they already know how much you like photography and how talented you are – they’re probably going to be encouraging.
After all, they love you and want to be supportive.
However, if you chat with someone outside of your immediate circle — not a family member or friend — who has already taken the leap into freelance photography and ask them the pros and cons of such an endeavour, you’ll get a much more realistic picture of what a freelance photography gig is like.
When you factor in spending money on equipment and photo storage space, giving up your weekends and evenings for shoots, the long hours needed to edit photos, and being at the mercy of difficult customers, they might not outweigh benefits like the freedom to set your own schedule and earn more money with your hobby.
When you research both points of view, the best that can happen is you get some good advice, know exactly what you’re getting yourself into, and will rest easy knowing you made the right choice.
Maybe you’ll change your mind and save yourself from making a decision that’s going to be frustrating and expensive.
Of course, confirmation bias isn’t always a bad thing.
We can often can bust through stereotypes and defy the odds because the people around us are championing our success, not pointing out that the cards are stacked against us or that our chances are slim.
However, it can also hold us back – keeping us in the cycle of making detrimental financial decisions and spending money on things we don’t need and can’t afford because the people we turn to for advice aren’t going to tell us it’s a bad idea after all.
* Marisa Bell-Metereau is a writer.
This article first appeared at thefinancialdiet.com
