The media attributes reason to explain the stock market movements every day. Recently, for instance, it was the ‘strong Asian cues’ that sent the market up one day only to have the ‘weak Asian cues’ bring the market down the next day.
If you are statistically inclined, you would be wary of attributing reasons to the market movement. Logically, you have to break the relationship to see if FIIs pulling out money, for instance, brings the market down. Here are the questions you should ask. How many times has the market declined when the FIIs pulled out of India? How many times has the market declined without the FIIs pulling out of India? How many times has the market not declined when the FIIs pulled out of India? How many times has the market not declined when the FIIs did not pull out of India?
So, why are we instead so quick to attribute reasons? We witness the event first and then look for factors that could have caused the event.
So, if you see the market crash, and also happen to catch FIIs outflows, you are more likely to conclude that FIIs caused the market to decline.
Psychologists attribute this behaviour to confirmation bias. This refers to our behaviour to seek information that is consistent with our preconception rather than look for evidence that can challenge the belief. In this case, we want to believe that FIIs pulling out money or ‘weak Asian cues’ are the reason for the decline. So, we are unlikely to look for evidence to disapprove the belief.
But why do we seek evidence consistent with our preconception?
Our brain actively seeks to rationalise events. Logically then, we need others to provide reasons to explain events that we do not understand yourselves. And we tend to accept any reason, as a classic experiment conducted by a Harvard psychologist years ago demonstrates.
In the experiment, individuals were standing in a queue to photocopy papers. Some were instructed to jump the queue; the researchers wanted to observe how others in the line would react to people jumping ahead of them. Interestingly, in most cases, individuals were permitted to jump the queue if they offered any reason to the people in front of them.
For instance, a reason such as ‘I want to use the copier as I am in a hurry’ was enough to jump the line! It is, perhaps, with the same fairness that we accept reasons given to us to explain the daily stock market movements.