How Does Confirmation Bias Interact with Other Cognitive Biases, like Anchoring, during a Market Collapse?

During a market collapse, confirmation bias and anchoring can create a potent combination that exacerbates losses. Anchoring occurs when a trader fixates on an initial piece of information, such as a previous high price, and uses it as a reference point for all future decisions.

As the price plummets, a trader anchored to the old high might view the falling asset as "cheap" and hold on, believing it will return to its former value. Confirmation bias then reinforces this belief, as the trader will seek out any information that supports their hope of a rebound, while ignoring the mounting evidence of a continued decline.

This deadly duo can lead to a refusal to cut losses, as the trader is psychologically trapped by their initial anchor and their biased search for confirming evidence.