Confirmation Bias: The Investor’s Favourite Trap.

“Survivorship bias makes us look only at winners. Confirmation bias convinces us we were right to believe in them all along.”

In 1633, Galileo stood before the Roman Inquisition. The evidence for a sun-centred universe was piling up, but the Church had already made up its mind. Earth was the centre. Anything else was heresy. The facts were there, but they did not fit the worldview, and so they were ignored. As a result, scientific discovery was delayed for decades. Ideas that could have accelerated astronomy, navigation, and our understanding of the cosmos were forced into silence. Progress stalled not because the data was absent, but because no one was willing to challenge their own beliefs and look at it.

The tragedy is not that knowledge was missing, but that it was present and rejected. The cost of bias was time, innovation, and truth itself. And this same dynamic plays out in investing: it’s not that information isn’t available, it’s that decision-makers filter it through the lens of what they already believe.

Fast forward four centuries, and the boardroom does not look so different from that courtroom. Venture capitalists and corporate acquirers walk into diligence rooms with a thesis already in hand. Instead of asking, “What could break this deal?” they subconsciously ask, “What proves I’m right?” That subtle shift in framing is enough to distort the entire process. This is confirmation bias. It is the investor’s favourite trap because it feels like confidence but functions like blindness.

When Diligence Becomes Storytelling

Due diligence is meant to be forensic, but confirmation bias turns it into storytelling. A company that neatly aligns with a hot thesis- say, AI in 2025 or crypto in 2021- benefits from selective vision.

• Flaws become “growth pains.”

• Risks are framed as “market timing issues.”

• Gaps in execution are recast as “room to scale.”

  
  

The echo chamber builds quickly. Analysts present numbers that reinforce the optimism. Advisors repeat the same story. Co-investors, eager not to miss out, nod along. What begins as a hypothesis hardens into conviction, not because the evidence demanded it, but because dissenting signals were edited out.

The investor leaves diligence not with clearer sight, but with a more polished mirror.

The Classic Echo Chamber Cases

WeWork (2019): Investors fell in love with the idea that this was a “tech company” disrupting real estate. The reality was more mundane: it was a lease arbitrage model, locking in long-term rents and subletting short-term space. Any downturn would expose its fragility. The warning signs were visible: mounting losses, eccentric governance, questionable unit economics. But those did not fit the story, so they were side-lined.

Theranos: Few stories illustrate confirmation bias as vividly. Investors saw what they wanted to see: a charismatic founder, powerful endorsements, and the promise of revolutionizing healthcare. What they did not see- or refused to look closely at, was the lack of peer-reviewed science, the opaque technology, and the evasive culture. Due diligence often stopped at reputation. Skepticism was treated as cynicism. Billions disappeared into belief.

Crypto Boom (2021): Bitcoin’s dramatic rise seemed to “prove” that blockchain would reshape everything from payments to art to governance. Capital poured into thousands of tokens and start-ups. By 2023, nearly three-quarters had vanished. The data on weak fundamentals was there all along: anonymous teams, unsustainable token omics, non-existent adoption. Confirmation bias turned speculative hope into a self-reinforcing narrative.

In each case, investors were not blind. They simply edited reality down to the parts that matched their conviction.

Why It Is So Dangerous

Unlike simple errors, confirmation bias does not stay contained. It compounds across firms, across markets, and across cycles.

• Inflated valuations rise when every piece of evidence is cast in the rosiest light.

• Herd mentality spreads as syndicates, advisors, and media all repeat the same bullish frame.

• Risks hide in plain sight, but no one wants to break consensus.

• M&A disasters multiply when “strategic fit” becomes a shield against hard questions about integration, culture, or regulatory landmines.

  
  

The danger is not missing data. It is misusing the data we already have. Billions are lost not because no one knew better, but because no one wanted to know better.

How Echo Chambers Actually Form

It is tempting to think of bias as an individual blind spot, but in investing it often becomes systemic.

Inside a VC firm, junior analysts are incentivized to reinforce the partner’s thesis. In corporate M&A, internal teams want deals to go through, because failed deals mean stalled promotions. Media headlines amplify only the winners, adding social proof. And co-investors rarely want to be the lone sceptic in a syndicate.

The structure itself creates an environment where dissent feels costly and consensus feels safe. In that environment, confirmation bias is not a glitch. It is the default.

Escaping the Echo Chamber

Breaking free requires more than intelligence. It requires designed doubt.

Some firms assign a devil’s advocate for every deal, whose explicit mandate is to build the bear case. Others run red team versus blue team diligence, pitting optimism and scepticism against each other to see which argument survives pressure-testing.

Another simple but powerful technique is inversion. Instead of asking, “Why will this succeed?” the team asks, “Why will this fail?” That single reframe changes the evidence you are willing to consider.

Pre-mortems are another discipline. Imagine the deal has collapsed five years from now. Write the post-mortem in advance. The exercise forces investors to acknowledge risks they would rather wave away.

And perhaps the most underrated safeguard: bring in outside voices. Advisors, operators, or domain experts who have no financial or reputational stake in the deal can see what insiders overlook. They are not seduced by the story. Firms like ours are capable of acting as such outside voices. 

The best firms do not treat these as optional add-ons. They bake them into culture. They reward dissent as much as consensus. They make space for discomfort, knowing t

hat comfort in diligence is usually a red flag.

Conviction vs. Illusion

Confirmation bias is seductive because it feels so good. It rewards conviction, flatters intuition, and builds consensus. But conviction without confrontation is an illusion.

Real diligence begins not when everyone nods in agreement, but when someone dares to ask the uncomfortable question. The most valuable investors are not the ones who tell the most compelling story. They are the ones who can sit with the possibility they might be wrong and follow the evidence wherever it leads.

Because in investing, as in Galileo’s time, the cost of ignoring uncomfortable truths is not just embarrassment. It is the price of mistaking belief for reality.