Bias Set Of Cognitive Processes
Lesson summary:
The concept of motivated reasoning describes the inverse of objective reasoning. Instead of gathering all relevant evidence and forming conclusions, one decides on a conclusion first and then selectively gathers or interprets evidence to support this pre-determined belief. This process often arises from our emotional need to reduce cognitive dissonance and maintain our existing beliefs. As a result, evidence that supports pre-existing views is accepted, while contradictory evidence is ignored or rejected.
An everyday example could be a person’s belief about climate change. If someone is deeply invested in the idea that climate change is a hoax, they may ignore vast scientific consensus and focus on the few, often discredited, studies that support their belief. In this scenario, their feelings towards the subject come first, and evidence is merely a tool to reinforce these preconceptions.
How Bias Set Of Cognitive Processes applies to investing and trading:
Motivated reasoning has significant implications in the field of investing and trading. A trader may have a preconceived notion that a certain sector, say renewable energy, is destined for significant growth. They might then focus on positive news about government support for renewable energy or advancements in related technology, while ignoring challenges like regulatory hurdles or technological limitations.
For example, a trader may see a news report about a government grant for renewable energy and decide that this means a renewable energy company they’re considering investing in will do well. They may then ignore other information, such as a lack of profitability or a saturated market. As a result, they could make an investment decision based on their pre-existing belief rather than a comprehensive analysis of the company’s prospects. This type of decision-making could lead to poor investment outcomes. It highlights the importance of objective reasoning in trading, where a balanced evaluation of all available evidence is crucial.