Confirmation bias

The purpose of this chapter is to emphasize the implication of psychology with respect to the behavior of a financial economist. To this end, this chapter, first, brings to the fore a psychological phenomenon called “confirmation bias,” according to which people seek or interpret evidence in ways that support their existing beliefs, expectations, or hypothesis. This chapter, then, discusses how this phenomenon biases the attitude of a financial economist. That is, a financial economist, who is equipped with a specific theoretical hypothesis, would have an unconscious biased attitude in the interpretation of current economic events or other economic issues. Unless the financial economist gets exposure to this phenomenon and becomes acquainted with alternative theories and points of view (e.g., through a multi-paradigmatic approach), the financial economist will have an unconscious biased and partial view of the financial and economic world. This is because the perspective of the observer determines the limits of what can be seen.