Confirmation Bias: How Investors End Up Talking Themselves Into Trouble

Recently, there was ample discussion about discount brokers losing lakhs of active investors in early 2025.

- Dhirendra Kumar

The narrative was compelling and widely accepted: Sebi's stricter futures and options (F&O) regulations had finally caught up with speculative traders, forcing them to abandon their platforms. Market commentators, social media influencers and financial journalists all nodded in agreement. The data seemed to confirm what everyone expected after the regulatory changes.

There was just one problem: the underlying data told a completely different story. "Active investor" in the NSE reporting means someone who has executed at least one trade in the preceding 12 months. This means that an investor is only dropped from the active count one full year after they stop trading. The decline in active investors reported in the first half of 2025, therefore, reflected individuals who had stopped trading in the first half of 2024, long before the recent regulatory changes took effect.

This episode illustrates a pervasive cognitive trap in financial analysis: confirmation bias. We seek information that supports our existing beliefs, while ignoring or dismissing contradictory evidence. When data appears to validate our preconceptions, we rarely dig deeper to understand what it actually means.