In this guide, we explain in detail the four dangers of system justification bias in investing and concrete methods to overcome them, including real-world examples.

1. Investment Judgment Errors: Hinders Objective Evaluation

System justification bias can cause investment judgments to go astray. For example, even if a mutual fund you chose performs poorly, you may convince yourself, “This fund will yield good results in the long run.”

Examples:

• Choosing a mutual fund based on past strong performance and hesitating to sell despite subsequent poor results.

• Sticking stubbornly to your chosen investment method and neglecting to consider other approaches.

Overcoming methods:

• Make investment decisions based on objective data.

• Recognize that your chosen system or framework has weaknesses.

• Regularly analyze investment performance and revise as needed.

2. Risk Underestimation: Overconfidence in the System

System justification bias can cause you to downplay investment risks. Overconfidence that “the system I chose is safe” is a major danger for investors. No system is risk-free, and safety does not guarantee profits.

Examples:

• Overconfidence in system trading leads to neglecting risk management.

• Being swayed by enticing promises of “safe high returns” in investment scams.

Overcoming methods:

• Always be aware that any system has risks.

• Understand the mechanics and risks of the system before investing.

• Compare multiple systems and diversify investments.

3. Misattribution of Responsibility: Blaming the System

When investments fail, system justification bias can lead you to think, “The system was to blame.” This hampers self-reflection and can prevent you from improving your investing skills.

Examples:

• When you fail, criticizing “the system was wrong” and absolving yourself of responsibility.

• Not analyzing the causes of failure outside the system or taking corrective actions.

Overcoming methods:

• Understand that everyone experiences failures in investing and avoid blaming yourself excessively.

• Analyze the causes of failures and apply learnings to improve the system.

• If needed, consult experts and receive objective advice.

4. Exit from the Market: Disappointment and Distrust

System justification bias can lead to disappointment and distrust of the market. If the system does not deliver as expected, you may exclaim, “The market is rigged,” and withdraw from investing.

Examples:

• When the market declines, cry, “The market is rigged,” and quit investing.

• Failing to understand the various biases present in the market, incurring unnecessary losses.

Overcoming methods:

• Understand that the market is not always fair.

• Study market mechanisms and investment theory to analyze market movements.

• Invest with a long-term perspective and avoid being swayed by short-term fluctuations.

Summary

System justification bias can trap investors in four pitfalls.

• Errors in investment judgment

• Risk underestimation

• Misattribution of responsibility

• Withdrawing from the market

To overcome these pitfalls, keep the following in mind.

• Base investment decisions on objective data.

• Always be aware that all systems have risks.

• Learn from failures and apply improvements to the system.

• Study market mechanisms and investment theory and make calm, informed judgments.