PRACTICAL APPLICATION

 IBM’s case

 OS/2 Operating

 Competition with Microsoft

 Failed operating system

Implications for Investors

 In finance, the effects of confirmation bias can be observed

almost daily.

 Example of internet message board.

 Consider, in particular, an examination of the hypothesis that

low dividend yields forecast low returns while high dividend
yields forecast high returns.
RESEARCH REVIEW

 Professor Meir Stamen and investment professional Ken Fisher

 Confirmation bias can cause investors to seek out only
information
that confirms their beliefs.
 Confirmation bias can cause employees to over-concentrate in
company stock. As IBM and other examples demonstrate.
 Confirmation bias can cause investors to continue to hold
under-diversified portfolios.
DIAGNOSTIC TESTING

Confirmation Bias Test

 Question 1:

 Question 2:
 DIAGNOSTIC TESTING

Question 1:
 Suppose you have invested in a security after some careful
research. Now, you come on a press release that states that the
company you’ve invested in may have a problem with its main
product line. The second paragraph, however, describes a
completely new product that the company might debut later this
year. What is your natural course of action?
 a. I will typically take notice of the new product announcement
and research that item further.
 b. I will typically take notice of the problem with the company’s
product line and research that item further.
DIAGNOSTIC TESTING

Question 2:
 Suppose you have invested in a security after some careful research.
The investment appreciates in value but not for the reason you
predicted (e.g., you were enticed by some buzz surrounding a new
product, but revival by an older product line ultimately lifted the stock).
What is your natural course of action?
 a. Since the company did well, I am not concerned. The shares I’ve
selected have generated a profit. This confirms that the stock was a
good investment.
 b. Although I am pleased, I am concerned about the investment. I will do
further research to confirm the logic behind my position
Test result analysis

 Answer 1

 Answer 2
How to Overcome

 General Confirmation Bias Behavior

 Selection Bias.

 Company Stock.

 Overconcentration.