Chinese New Year Preparation: Navigating Confirmation Bias in Tax Planning

Introduction

As the festive spirit of Chinese New Year fills the air, February also brings a significant season for financial planning—especially when it comes to taxes. While you prepare for celebrations, keeping a sharp eye on your financial matters, particularly your tax planning and investment strategies, is essential. However, there’s a cognitive trap that many of us fall into during this time of year: confirmation bias. This month will explore how confirmation bias can affect your tax decisions and provide strategies to help you avoid costly mistakes.

During Chinese New Year, we all participate in gifting, family gatherings, and, increasingly, online shopping. The convenience of online platforms means purchasing gifts, decorations, and all the essentials for your New Year’s celebrations is easier than ever. Therefore, more than ever, this convenience has led to an increasing number of psychological phenomena known as confirmation bias.

What is Confirmation Bias?

Confirmation bias is the tendency to search for, interpret, and remember information in a way that confirms your pre-existing beliefs. During tax season, this bias can lead individuals to focus only on the tax credits and deductions that align with what they want to believe, potentially overlooking essential details that could affect their financial situation. During Chinese New Year preparations, shoppers may focus on deals or products that align with their beliefs about quality or necessity, ignoring more practical or budget-friendly options.

Globally, consumers influenced by confirmation bias tend to overspend on holiday seasons, including Chinese New Year, by sticking to specific brands or stores without exploring more economical alternatives. This can lead to overspending, as individuals may justify unnecessary purchases based on selective information that supports their desires or preconceived notions. This can result in missed opportunities for savings or better resource investment.

Case Study: Confirmation Bias in Financial Decisions

Singapore Scenario

In Singapore, confirmation bias is prevalent in how individuals consume information online, particularly during festive periods like Chinese New Year. This can lead to selective media consumption, where people only seek deals or information that align with their beliefs, often resulting in higher spending. A study by the Institute of Policy Studies (IPS) highlighted that Singaporeans are particularly susceptible to false information due to confirmation bias, as they tend to consume media that reinforces their existing beliefs. This bias can extend to online shopping, where consumers might ignore warnings or advice that contradict their shopping habits or preferred retailers.

An elderly man in Singapore nearly lost S$3.7 million to scammers who posed as Chinese police officers. His confirmation bias led him to trust the scammers implicitly because of his preconceived notions about Chinese police being trustworthy. He dismissed warnings from family, friends, and even authorities, illustrating how dangerous confirmation bias can be when it influences financial decisions.

Risk Management Strategies

1. Challenge Your Assumptions

  • Before making any significant financial decision—whether it’s claiming a tax deduction or adjusting your investment portfolio—take a moment to question your underlying assumptions. Are you focusing too heavily on information that confirms what you already believe? What are the potential downsides or risks that you might be ignoring?

2. Implement a ‘48-Hour Cool-Down Period’

  • Financial decisions, especially during tax season, can be emotionally charged. To avoid making hasty choices influenced by confirmation bias, implement a ‘48-hour cool-down period’ before finalizing any decision. This gives you time to process the information, seek out additional sources, and reconsider your options with a clear mind.

3. Diversify Information Sources:

  • When planning your taxes or making investment decisions, don’t rely solely on one source of information—whether it’s a financial advisor, a favorite blog, or a single news outlet. Instead, gather insights from a variety of sources, including different experts, financial news platforms, and official government publications. By exposing yourself to a broader range of opinions and data, you’re less likely to fall into the trap of confirmation bias.

Mrs. Lim, a Singaporean shopper, initially planned to purchase all her Chinese New Year supplies from her favorite online store, driven by positive past experiences. However, after diversifying her information sources and comparing prices across different platforms, she found better deals elsewhere, saving her hundreds of dollars.

Additional Resources

Additional Resources

Articles & Studies:

IPS Study on Singaporeans and False Information

Research on Social Media Influence

Tools & Downloads:

Downloadable PDFs: “Checklist for Avoiding Confirmation Bias in Financial Decisions”

Interactive Tools: “Tax Planning Calculator” and “Investment Diversification Simulator”