Confirmation Trap
Psychologists know that after bettors at a racetrack put down their money, the bettors are more confident in the prospects of their horses winning than moments before they placed their bets on the specific horses. After making their decision, they become confident and think that they made the right decision even if that decision is wrong.
An investor who has recommended a specific stock to his clients, particularly when he announced his recommendation publicly, with loud supportive logic and his own buying, feels that he needs to stick with his own decision. All his logic is filled with good perspective and positive view of this specific stock. This is called “a confirmation trap.”
This is not unique to “money investors” only. Similar rules and results can be observed of “time investors” and “commitment investors”. For example, assuming you are a religious person and you like people who come to your church. The more you engage in your church’s activities, spend time with your fellow friends, donate your money to help people in your church, the more confident and happier you become. Your church looks the greatest in your eyes even though there are so many bystanders questioning the quality of your church.
The book, “Influence: The Psychology of Persuasion.”
According to Robert Cialdini, the author of the book, our six (6) tendencies, or human natures, are important factors to influence people strongly. These tendencies are deeply rooted in our psychology at the intuitive level.
- Reciprocation
There is no human society that does not feel the obligation to reciprocate. A charitable organization sends free address labels to us. We feel obliged to send some money to them. - Commitment and consistency
Once we make a decision and make a public affirmation of that decision, we do not change our view. The investor’s recommendation is the example. - Social validation
We make decisions based on observing other’s decisions. We tend to copy them even if it is a bad decision. - Liking
We all tend to say YES to people we like. They may be similar to us, they do compliment us, cooperate with us, and they are attractive. - Authority
People obey authority figures against their better judgment. - Scarcity
We find items more attractive if they are either scarce or perceived to be scarce, for example: limited time offer of sale items.
Our problems are not confined to this list alone. These are just major ones. We need to understand our individual’s own tendency before we decide to invest our money. The list reminds us to check what kind of person we are before too late. Know thyself before knowing others is always the key to live better. Simple, yet tough to execute.