Any Investor's Biggest Enemy Isn't the Market. It's Your Own Brain.
I spent over a decade as an investment banker, first at Nomura and then as a Vice President at Deutsche Bank, working on M&A transactions across North America and Europe. Deals worth hundreds of millions of dollars. Rooms full of very smart, very well-paid people with very specific views about how a deal should play out.
And in all of that time, the pattern I saw destroy value most consistently wasn't bad strategy. It wasn't poor execution. It was a room where everyone had already decided what they wanted to believe before the analysis even started.
The research would get commissioned. The models would get built. The advisors would get hired. But the data that confirmed the thesis got championed. The data that challenged it got quietly 'contextualised.' Set aside. The deal closed. Two years later, everyone asked why no one saw it coming. They did see it. They just didn't want to.
That's not a failure of intelligence. That's just human wiring. And it shows up just as clearly in a Zerodha account on a Sunday morning as it does in a boardroom in Chicago. It's called confirmation bias. And it's probably the most expensive mental habit in investing.
What Confirmation Bias Actually Is
Confirmation bias is the tendency to search for, interpret, and recall information in a way that confirms what you already believe. British psychologist Peter Wason first documented it rigorously in the 1960s, and decades of research since have confirmed that it is one of the most persistent quirks in human thinking.
In everyday life, this wiring actually serves us. Quick, pattern-based decisions kept us efficient for thousands of years. But in financial markets, where conditions change faster than beliefs do, the same instinct becomes a liability. You stop looking for truth. You start looking for confirmation.
When an Entire Market Falls for It
You don't have to look far for a recent example. Cast your mind back to early 2024, when SEBI raised formal concerns about the froth building up in India's small and mid-cap mutual funds. The BSE Small-Cap index had delivered nearly 47.5% returns in 2023 alone. Retail inflows were pouring in through SIPs. By February 2024, small-cap funds were managing over ₹2.49 lakh crore in assets.
SEBI was concerned enough to mandate stress tests. The results were sobering. Some of the largest small-cap funds would take upward of 27 days just to liquidate 50% of their portfolio if redemptions spiked. In plain English: if the market turned sharply, these funds could face serious liquidity pressure.
The data was public. The regulator was flagging a specific risk. And what happened next? Retail inflows continued. The Telegram groups filled with posts about why SEBI was being overcautious. Why the regulator doesn't understand India's long-term structural story. Why this was actually a buying opportunity.
That's confirmation bias operating at a market-wide scale. Hundreds of thousands of investors, each independently deciding that the information supporting their existing bullish view was credible, and the information challenging it was noise.
What It Actually Costs You
Let's bring this down to one investor level and put a number on it.
Take Arjun, 32, a marketing manager in Hyderabad. In early 2023 he invested Rs. 5 lakhs in a real estate sector fund. His thesis was reasonable: post-pandemic demand, IT-salary growth in tier-1 cities, government infrastructure spending. Then the data started turning. RBI was hiking rates. Developer debt was rising. The warning signs were there.
But Arjun's WhatsApp group stayed bullish. He followed the one analyst still calling a supercycle. He bookmarked the positive articles and scrolled past the bearish ones. He exited 14 months later with a 40% loss. A friend who read both the bull and bear case genuinely, recognised the shift early and exited at a 20% loss.
The gap between those two exits was ₹1 lakh. That ₹1 lakh, reinvested in a Nifty 50 index fund at 12% annual returns, becomes ₹1.76 lakhs over 5 years. An effective ₹76,200 in returns alone.
Confirmation bias didn't cost Akram Rs. 1 lakh. The real cost, in opportunity terms over 5 years, is Rs. 76,234 in returns he never earned. That's the money he worked against himself, quietly, through no single catastrophic decision. Just through a habit of only reading what he wanted to read.
How to Actually Fight It
- Actively seek out the bear case
For every position you hold, find and genuinely read at least one credible argument against it. Not to be persuaded, but to understand what would make you wrong. In my years of doing deals, the advisory teams I respected most were the ones who could articulate the bull and bear case with equal clarity. If you can't find a thoughtful bear case for your position, you haven't done enough research. - Use the pre-mortem
Before committing money, imagine it's 12 months from now and the investment has failed. Ask yourself: what went wrong? This one mental shift forces your brain to generate failure scenarios that it would otherwise skip entirely. It's uncomfortable. It's also one of the most effective decision-making techniques I know. - Keep an investment journal
Write your thesis and key assumptions when you enter any position. Review it every quarter. Over time your journal tells you, honestly and without ego, which of your beliefs have been right and which ones you kept holding onto after the evidence stopped supporting them. This is harder than it sounds. - Get a genuine devil's advocate
Someone who will push back on your thesis without an agenda. A friend, a reading group, a study partner. The one condition: they have to actually be willing to disagree with you. If everyone in your investing circle is bullish on the same thing, that's a signal worth paying attention to.
The strongest investors I've encountered, whether in boardrooms at Deutsche Bank or in conversations I have now building Vessify, are not the ones with the most conviction. They are the ones who can hold a view while actively questioning it. Confidence and intellectual honesty are not opposites. In investing, the best of them live together.
Your confirmation bias is not going away completely. But naming it, watching for it, and building one or two habits to counteract it is already most of the battle. The next time you read something that perfectly confirms what you already believe about a stock or a fund, that is precisely the moment to go looking for the opposite view.
Has confirmation bias ever cost you money?