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One fine day, with the stock market in deep crisis after a long downtrend, you look things over and decide to buy HPG shares of Hoa Phat Group, hoping to “bottom-fish” the stock. At that moment, how many other investors do you think would agree with your decision?
When asked a question like this, many people assume that lots of others would make the same decision. In social psychology, this skew in decision-making is considered a type of cognitive bias, commonly known as the “false consensus bias”.
False consensus bias
What is the false consensus bias?
On any issue, whatever the decision, social psychologists have shown that people tend to overestimate how many others agree with them. We assume our decisions are fairly normal and appropriate, and that most people share the same view. We use our own decisions as an “anchor” and judge what others will do based on what we would do.
This decision-making bias can contribute to overconfidence. Once we have made a decision, we tend to be confident that it is right and that others will agree with us. In reality, that may not be the case.
Why does the false consensus bias occur?
Why does the false consensus bias occur?
When making a decision, people usually try to piece together past evidence to reach the most reasonable choice. Once a decision is made, the evidence supporting it “sits” in that person’s memory and is very easy to recall. The false consensus bias occurs when, in later decisions, we remember what we did and assume others will act the same way. In reality, judging what others will do based on our own past memories is inaccurate; we should look at the objective facts instead.
Some evidence, however, suggests that the false consensus bias depends on how certain a person is about a decision. For example, Dr. Gary Marks and Norman Miller, in their research, manipulated how certain the participants were about the decisions they made. The more confidence you place in your decision, the less accurate your estimate of how many others would make the same choice becomes. So the more certain people are about a decision, the more they believe others will behave as they do. And these false consensus estimates in turn make us feel even more confident.
So how can we counter the false consensus bias?
The best advice here is to always be sceptical of your own decisions. We need to take into account people’s tendency to seek out and confirm information, and to make decisions based on what is readily available in memory. Making decisions is so hard that we need all our mental energy to piece together the supporting information, but at the same time we must also look for information that challenges our decision in order to find a good stock.
So after you have gathered your information and before you reach a final conclusion, pause for a moment and ask yourself: “Is my decision lacking objectivity?” and “Have I looked at the facts objectively, or am I just trying to confirm a belief I already held?” Always remember that your perception can be affected by many common decision-making tendencies, including the false consensus bias.
Happy trading!
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