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I recently came across a post on the Victor Niederhoffer Blog about the concept of Confirmatory Bias. I shall reprint the standard quote from Sir Francis Bacon that is used in much of the literature on this subject:

"The human understanding when it has once adopted an opinion (either as being the received opinion or as being agreeable to itself) draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects; in order that by this great and pernicious predetermination the authority of its former conclusions may remain inviolate..."

After searching further, I came across a paper published in the Review of General Psychology in 1998 authored by Raymond S. Nickerson of Tufts University. I believe that the concepts he discusses have applicability to current beliefs by bullish energy investors in the oil market.

He presents a modern definition of the concept of Confirmatory Bias;

"...the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand."

In his paper he reduces the concept to its component parts.

I have already discussed the first two parts last week, and parts three and four here.

Today I present my own concepts. They don't really come under the strict definition of Confirmatory Bias, but they are certainly biases that support the bubble, and after all, its my blog and if I want to write about them I will.

Glorification of results or the market must be right.

Oil and Energy has been in a multi year bull market and if there is one thing I have noticed in investing, it is the presumption that because the "market" says something, then the "market" must be right. This is a situation where the "psychological high" that accompanies good investment results is substituted by investors for thorough analytical thought.

Commodities are up 50% this year, well there must be something to it. "These guys must know what they are doing, I guess I'm just not smart enough to figure it out," an investor mumbles under his breath as he heads to his broker, bitter about missing out on the good times.

I can find quotes to apply to other bubbles as well. How about this one for the Housing Bubble.