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A Bad Case of Confirmation Bias

A Bad Case of Confirmation Bias

Nick Cawley, Strategist

Confirmation Bias - The tendency to look for and favor information that confirms your prior belief.

At the start of this year, I was convinced that the US Federal Reserve would start hiking interest rates sooner rather than later and that US Treasury bond yields would rise accordingly. As the year progressed, I felt that the Fed was overlooking the potential increase and stickiness of inflation – transitory, really? – and that the yield on the 10-year UST would hit 2%. By the end of the year at the very latest. Even when bond yields stayed low, I felt sure that the market pricing was incorrect and found many articles that agreed with me, boosting my belief further. As yields began to fall, my frustrations grew, and I started to believe that a ‘bond tantrum’ would likely occur within weeks with yields soaring to the levels I anticipated. Nothing happened and when the yield on the 10-year UST fell to around 1.25% in mid-July, I threw in the towel. And to make things even worse, for years I traded corporate and government bonds for a living on behalf of a range of banks. If I had made this year’s call at any of those banks, I would have been job hunting by Autumn.

The problem with confirmation bias is that you become increasingly stubborn with your outlook with any price action that moves against your position wrong in your view. This can lead to other fatal trading errors including removing your stop loss or doubling down. Next year I will learn to be humbler and try and always read, properly, the opposite argument to my view and be honest enough with myself to admit when I am wrong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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