information bias

Examples of information bias in the following topics:

• Implications and Limitations of the Efficient Market Hypothesis

  • The limitations of EMH include overconfidence, overreaction, representative bias, and information bias.
  • Behavioral economists attribute the imperfections in financial markets to a combination of cognitive biases such as overconfidence, overreaction, representative bias, information bias, and various other predictable human errors in reasoning and information processing.
  • Further empirical work has highlighted the impact transaction costs have on the concept of market efficiency, with much evidence suggesting that any anomalies pertaining to market inefficiencies are the result of a cost benefit analysis made by those willing to incur the cost of acquiring the valuable information in order to trade on it.
  • Despite this, Fama has conceded that "poorly informed investors could theoretically lead the market astray" and that stock prices could become "somewhat irrational" as a result.
  • Critics have suggested that financial institutions and corporations have been able to decrease the efficiency of financial markets by creating private information and reducing the accuracy of conventional disclosures, and by developing new and complex products which are challenging for most market participants to evaluate and correctly price.

• Personal Biases

  • Confirmation bias: This is probably the most common and the most subliminal, as many people naturally exhibit this bias without even knowing it.
  • Anchoring: This is the over-reliance on a single piece of a priori information or experience that affects one's ability to adjust to new potentially relevant information.
  • Overconfidence bias: This is another potentially disruptive personal bias and occurs when a person subjectively overestimates the reliability of their judgments versus an objectively accurate outcome.
  • Other personal biases can take on a variety of forms and may extend to either the holder of the bias or to external parties.
  • Personal biases toward information, intelligence, gender, ability, handicap, race, or other closely held beliefs are detrimental to decision-making processes and are often hard to counteract.

• Diversity Bias

  • A cognitive bias is the human tendency to make systematic decisions in certain circumstances based on cognitive factors rather than evidence.
  • Bias arises from various processes that are sometimes difficult to distinguish.
  • These processes include information-processing shortcuts, motivational factors, and social influence.
  • Examples include the false-consensus bias, status quo bias, in-group favoritism, and stereotyping.
  • Status quo bias should be distinguished from a rational preference for the status quo, as when the current state of affairs is objectively superior to the available alternatives, or when imperfect information is a significant problem.

• Cognitive Biases

  • Perceptual distortions, such as cognitive bias, can result in poor judgement and irrational courses of action.
  • Bias arises from various processes that can be difficult to distinguish.
  • Confirmation bias - Simply put, humans have a strong tendency to manipulate new information and facts until they match their own preconceived notions.
  • Self-serving bias - Another common bias is the tendency to take credit for success while passing the buck on failure.
  • Belief bias - Individuals often make a decision before they have all the facts.

• Heuristics and Cognitive Biases

  • Hindsight bias occurs in psychological research when researchers form "post hoc hypotheses."
  • The confirmation bias leads to the tendency to search for, or interpret, information in a way that confirms one's existing beliefs.
  • This occurs when we look only for information that affirms what we already believe to be true.
  • Confirmation bias is especially dangerous in psychological research.
  • This is a person's tendency to seek patterns in random information.

• Problem-Solving

  • The way we solve problems can be influenced by algorithms, heuristics, intuition, insight, confirmation bias, and functional fixedness.
  • Confirmation bias arises when a person makes decisions based upon what he or she already believes to be true.
  • This occurs when objective information is available, but two different sides involved in a debate each believe the information supports their respective beliefs.
  • The actual information is not usually taken into account to come to such a conclusion; instead, only the pieces of the information which support one's own belief are considered.
  • Selective-Comparison Insights, which involve novel perceptions of how new information relates to old information; and

• Memory Distortions and Biases

  • Even when participants recalled accurate information, they filled in gaps with false information.
  • There are many identified types of bias that influence people's memories.
  • Hindsight bias is the "I knew it all along!"
  • This is known as the self-serving bias.
  • Evaluate how mood, suggestion, and imagination can lead to memory errors or bias

• Sampling Bias

  • This section discusses various types of sampling biases including self-selection bias and survivorship bias.
  • Gains in stock funds is an area in which survivorship bias often plays a role.
  • Therefore, there is a bias toward selecting better-performing funds.
  • There is good evidence that this survivorship bias is substantial (Malkiel, 1995).
  • The idea was that this information would be useful for deciding where to place extra armor.

• Distorting the Truth with Descriptive Statistics

  • Bias is another common distortion in the field of descriptive statistics.
  • The following are examples of statistical bias.
  • Analytical bias arises due to the way that the results are evaluated.
  • Exclusion bias arises due to the systematic exclusion of certain individuals from the study
  • Descriptive statistics is a powerful form of research because it collects and summarizes vast amounts of data and information in a manageable and organized manner.

• Cognitive Biases as a Barrier to Decision Making

  • Confirmation bias: This bias occurs when decision makers seek out evidence that confirms their previously held beliefs, while discounting or diminishing the impact of evidence in support of differing conclusions.
  • Anchoring: This is the overreliance on an initial single piece of information or experience to make subsequent judgments.
  • Once an anchor is set, other judgments are made by adjusting away from that anchor, which can limit one's ability to accurately interpret new, potentially relevant information.
  • Overconfidence bias: This bias occurs when a person overestimates the reliability of their judgments.