Not that long ago, my wife and I were in the market for a new television. So we did what any cost-conscious consumer would do; we researched features and prices and once we found a television that we liked on sale, we finally purchased it. After we purchased it, we celebrated our successful purchase with a bottle of wine. We saved SO much money. Then I would tell people how great a deal we got, always comparing it to what it normally would cost if it wasn't on sale. Sometimes I would see the same television at a different store for more money and it further confirmed how awesome I thought we were.
Guess what I didn't do? I never looked back at the place we bought it from to see if it went down further in price. I never looked for it in the ads of other electronics stores. I mean, what if I found out I could have gotten it for less? I don't want to feel stupid...
There is a very common psychological trap that happens to everyone - confirmation bias. This exists because we like to feel good, and knowing that we made a good decision or have the right belief makes us feel good. We also don't like to feel dumb, and finding out that we made the wrong decision or turn out to be wrong in our beliefs makes us feel dumb.
To help us feel good about ourselves, we've become very good at seeking out information that confirms our beliefs and behaviors. At the same time, we downplay or ignore evidence that contradicts us. And here's the scary thing - we often don't even know we're doing this. We can convince ourselves of anything we want to believe; that it was a good purchase, it is a great investment, this idea is only correct one, and so on. It's not our fault - it's natural.
Don't Believe Me?
You might be thinking this couldn't possibly happen to you. You're far too smart for this, right? Try this little experiment. If you are an avid watcher of MSNBC, try watching Fox News for a while. Or, if you are a Fox News fan, try watching MSNBC. Time how long it takes for you to say out loud, "these people are ******* nuts!"
I am convinced that our tendency toward this bias is why this so-called "fake news" is so prominent. In the past, we used to have to go out of our way to seek out confirming evidence. In the process, we would have to read a headline in order to know we were going to ignore it, or start reading the article before deciding it doesn't jive with our beliefs. Now, with the technology tools that we have available to us, we can easily filter the information we see. We don't have to go out of our way to ignore information we don't want to see; we never see it in the first place. This strong tendency toward filtering data to see what we want to see makes it easy for dishonest people to craft catchy headlines and articles that catch our attention. And since it already jives with what we believe, we have no reason to find out if it's true.
If we aren't aware that this is happening to us, it can cost us a lot of money. When it comes to purchasing items, we can always justify any purchase - even if that thing we bought doesn't align with our values and goals. We can look at expensive websites to see how much it's "worth" and stay away from less expensive websites to avoid seeing it at lower prices. If it's an investment, we can easily search for articles and research reports that show us all of the upside. We can also ignore reports that highlight the downside of the investment. Worse, we can convince ourselves that those risks aren't very likely to happen, because we understand the investment.
All of this means that it is very likely that we can have less-than-ideal situations and not even know it.
What Can We Do About It?
Since this happens to us often without us even knowing about it - creating blind spots that, by definition, we can't see - the best thing we can do is learn that this is a thing. We can learn to recognize it. Awareness leads to better outcomes. Try to intentionally place more weight on views that are contradictory. Play Devil's advocate. If you find it hard to play Devil's advocate, find someone to play that role for you - a spouse or friend, a family member, or a trusted advisor. If, after placing weight on opposing views, we still come to the same conclusion, that's great. We might find that our world views can change. And that's okay, too.
Just being aware of confirmation bias will hopefully help you make smarter decisions with your money.