We all like to think we’re rational decision-makers, especially when it comes to money. But the truth is, our brains are wired with biases that can cloud our judgment—and one of the sneakiest culprits is confirmation bias. This mental shortcut tricks us into seeking out information that supports what we already believe while ignoring anything that challenges it.

In The Psychology of Money, Morgan Housel dives deep into how confirmation bias shapes our financial decisions—often leading to costly mistakes. Through real-life stories and sharp insights, he shows us why recognizing this bias is crucial for making smarter, more objective choices. Let’s unpack this idea with anecdotes from the book and explore how you can combat confirmation bias to take control of your financial future.

What Is Confirmation Bias, and Why Does It Matter?

Confirmation bias is the tendency to favor information that aligns with our existing beliefs or opinions. It feels good to be “right,” so we naturally gravitate toward data, news, or advice that validates our views. The problem? This selective thinking can blind us to reality, especially in the unpredictable world of finance.

Housel shares a simple but powerful example: Imagine you’re convinced a particular stock is going to soar. You’ll likely seek out articles, analysts, and social media posts that agree with your prediction, while dismissing warnings from skeptics. Even if the skeptics are right, you might ignore their advice because it doesn’t fit your narrative. This bias can lead to poor investment decisions, missed opportunities, and unnecessary risks.

When it comes to money, confirmation bias isn’t just annoying—it’s expensive. It keeps us stuck in echo chambers, reinforces bad habits, and prevents us from learning valuable lessons.

The Story of the Housing Bubble: When Beliefs Overruled Reality

One of the most striking examples of confirmation bias comes from the 2008 housing bubble. Homeowners, lenders, and investors were all convinced that real estate prices would keep rising forever. Why? Because everyone around them seemed to believe it too. People cherry-picked data showing steady price increases, ignored warning signs of overvaluation, and doubled down on risky mortgages.

Housel points out that even smart, well-educated individuals fell victim to this bias. They surrounded themselves with like-minded people who reinforced their beliefs, creating a feedback loop of overconfidence. When the bubble burst, millions lost their homes, savings, and livelihoods—not because they lacked intelligence, but because they refused to question their assumptions.

This story highlights a crucial lesson: confirmation bias doesn’t care how smart you are. If you’re not actively challenging your beliefs, you’re vulnerable to its influence.

The Tale of Two Investors: Open-Minded vs. Stubborn

Housel contrasts two types of investors: one who remains open-minded and another who clings stubbornly to their beliefs. The open-minded investor regularly seeks diverse perspectives, reads contrarian viewpoints, and adjusts their strategy based on new evidence. They understand that markets are unpredictable and that no single approach works all the time.

The stubborn investor, on the other hand, refuses to budge from their convictions. Whether it’s insisting on gold as the ultimate safe haven or swearing off stocks entirely, they double down on their beliefs—even when the facts change. While this might feel satisfying in the short term, it often leads to missed opportunities and subpar returns.

This contrast illustrates an important truth: success in investing isn’t about being the smartest person in the room—it’s about staying humble and adaptable. Confirmation bias thrives on rigidity, so combating it requires a willingness to evolve.

How to Recognize and Combat Confirmation Bias

So, how do you spot confirmation bias in action and prevent it from derailing your financial decisions? Here are some practical strategies inspired by Housel’s insights:

1. Seek Contrarian Views: Actively look for opinions that challenge your beliefs. If you’re bullish on a stock, read bearish analyses. If you’re convinced real estate is the best investment, explore arguments against it. Diversity of thought is your best defense against bias.

2. Ask Yourself Tough Questions: Before making a financial decision, pause and ask:

   • Am I only considering information that supports my view?

   • Have I looked at both sides of the argument objectively?

   • What evidence would change my mind?

3. Surround Yourself with Skeptics: Build a network of trusted advisors, friends, or mentors who aren’t afraid to challenge your assumptions. A healthy dose of skepticism can save you from costly mistakes.

4. Keep a Decision Journal: Document your investment choices and the reasoning behind them. When things go wrong, revisit your notes to identify patterns of bias. This self-awareness can help you course-correct.

5. Focus on Data, Not Narratives: Stories are compelling, but they can also be misleading. Base your decisions on hard data and long-term trends rather than emotional appeals or anecdotal evidence.

6. Admit When You’re Wrong: One of the hardest but most important steps is owning up to mistakes. Every investor gets things wrong sometimes. The key is to treat these moments as learning opportunities rather than failures.

   
   

Final Thoughts: Stay Curious, Stay Humble

At the end of the day, combating confirmation bias isn’t about doubting everything—it’s about staying curious and open to new ideas. The best investors aren’t the ones who always have the “right” answer; they’re the ones who constantly question their assumptions and adapt to changing circumstances.

As Morgan Housel reminds us, “Some lessons have to be experienced before they can be understood.” While we can’t eliminate confirmation bias entirely, we can learn to recognize it and mitigate its impact. By doing so, we position ourselves to make better, more informed financial decisions.

So, ask yourself:

• Am I surrounding myself with diverse perspectives, or am I stuck in an echo chamber?

• Do I cling to my beliefs too tightly, even when evidence suggests otherwise?

• What steps can I take today to stay open-minded and challenge my assumptions?

By embracing curiosity and humility, you’ll not only avoid the pitfalls of confirmation bias—you’ll unlock new levels of financial success.

TL;DR: Confirmation Bias in Finance

• Confirmation bias is the tendency to favor information that supports our existing beliefs, leading to poor financial decisions.

• Stories like the 2008 housing bubble highlight how rigid beliefs can blind us to reality and result in catastrophic outcomes.

• Open-minded investors who seek diverse perspectives outperform those who cling stubbornly to their convictions.

• Tips to combat confirmation bias:

  • Seek contrarian views and challenge your assumptions.

  • Ask tough questions before making decisions.

  • Surround yourself with skeptics and focus on data over narratives.

  • Keep a decision journal to track patterns of bias.

• Key takeaway: Staying curious and adaptable is essential for overcoming confirmation bias and making smarter investment choices.