Confirmation bias

Confirmation bias – Traders with confirmation bias seek and give greater weight to information that supports their existing beliefs or predictions, while downplaying contradictory data. In practice, a trader might only notice technical indicators that fit their bullish view and ignore bearish signals. An algorithmic trading system designed or tweaked by a biased human can inherit this flaw – for example, using backtest data to validate a preferred strategy while disregarding negative scenarios. Confirmation bias is “the tendency … to actively search for, interpret, and retain information that matches one’s preconceived notions”. In trading this leads to skewed decisions and missed warning signs as investors cling to their initial thesis.

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