Jul 2, 2012

A Famous Investor Falls for Confirmation Bias

It is human nature to selectively focus on the evidence that supports one's position and to ignore the rest. This is a layman's explanation of what behavioral psychologists refer to as "confirmation bias". It is also a very common reason why inexperienced traders lose money - they get "married" to their position and hold it long past the point at which their reason for entering it has lost validity. 

In his CNBC interview Financial ‘Armageddon’ Will Happen Despite EU Deal Jim Rogers holds the view that despite the large one-day rally, the agreement at the EU summit on Friday is unlikely to have a lasting impact on the stability of the Eurozone. At the same time he points out that commodities have rallied hard which helps his position. 

Of course the rally in both the Euro, commodities or in fact almost any risk asset was all triggered by the same event (and was probably to a large extent covering of short positions). So ignoring the Euro and cheering commodities is somewhat irresponsible or at least far from objective. Likewise, a complete financial collapse in Europe, were it to happen, is also likely to decimate global trade, and with it emerging markets demand for commodities.