Behavioral Economics has often been used as a weapon against the believers in efficient markets since it shows that people do not always act in an economically rational manner. While we here at Dumbagent.com are firm believers in the Efficient Market Hypothesis (EMH), we also simultaneously believe in this seemingly negating school of thought. How can this possibly be - you might ask? Well… unfortunately, Behavioral Economics (and Behavioral Finance) covers an extremely wide variety of disciplines so the answer is not quite as straightforward as we’d like to explain, but for starters, we’ll begin with one of the main talking points (which is also found in science): Confirmation Bias.

First discovered in 1960, Confirmation Bias demonstrated the fact that people deduce hypotheses through examples that confirm their beliefs rather than negate them.  It was shown to be relevant to many facets of life, of which the most obvious embodiment lies with how we consume the news: different people can read the same article and derive different conclusions based on their prior beliefs.

To better explain: Imagine if you tend to prefer candidate D over candidate R and you read an article saying candidate D’s policies are better for your country, then you will agree with the article and be happy that your prior beliefs have been confirmed. If, however, the article says candidate R’s policies are better for the country, you will tend to over-analyze the article itself for mistakes or inconsistencies in their reasoning so as to not have to give up your prior belief.

Consequently, this means that any randomly generated piece of news will confirm your belief more than 50% of the time and will also do the same for people with opposing points of view - even though you cannot have more than 50% of news articles promoting each point of view.

Taken in terms of markets, we can easily see how people can have Confirmation Bias for any sort of reason (the company is from the state/country you are from, etc., but many times the bias is towards the whichever piece of information was attained first). These biases, however, do not apply to more than one person at a time and different people will have different biases in different directions. Therefore as long as there are enough participants in the market, we would like to think that individual confirmation biases will not matter.