I am currently reading the book – The Black swan by N N Taleb. This is a great book on low probability, high impact events which are termed as black swans.

I am still in the middle of this book. One key point which I came across is ‘confirmation bias’ on which the author has devoted a complete chapter.

The basic idea behind confirmation bias is that once we make a decision, we tend to look for evidence to confirm it. As a result we tend to ignore any negative information which could refute our decision. As a corollary to this concept, any additional information is of no use as it would only re-inforce the decision and not add any more value to the decision making process.

Like others, I am equally susceptible to this bias. My approach to reduce its impact is to write a single page thesis on an investment idea and sometimes post it on my blog. I try to gather negative information and also prefer to get negative feedback on my idea. That helps me in wieghing all negative information and arrive at a better decision (hopefully).

I am not sure if I have been entirely successfull in it, but I have rejected a few ideas after selecting them, once I was pointed out some key information (which I had missed out). In a few other cases, the negative information, which I had missed earlier resulted in reducing my estimate of intrinsic value for the stock – for ex: I missed the impact of liabilities in the case of VST. As a result I ended up taking a smaller position

3 Comments

  1. Ranjit kumar says:

    Hi Rohit,

    To add writing a company analysis on the blog makes you more responsible and do that extra bit of work before presenting any information. My blog helped me a lot in improving the quality of my analysis reducing biases.

    Regards,
    Ranjit kumar

  2. Ravi S Ghosh says:

    I’m going through this book too, but the audio book, dont know how different it is from the text book. However, I’m going through the same bias after picking up hbstock @123.

  3. Rohit Chauhan says:

    i think the audio book should be similar to the printed version. i have found them to generally same. the only problem i have found with audio books is that if the book is complex in nature where i need to re-read, the audio version is not convenient

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