I have always been interested in psychology, neuroscience and behavioral sciences, however, I got particularly curious about psychological biases after taking several economics courses.
A lot of fundamental ideas in economics are based on the assumption that people are rational. I was dubious about this assumption from the very beginning though. Being flawless in its anatomy, our brain has several “default errors” when it comes to perception, decision-making, interaction with the external world, interpretation of events, etc.
Digging deeper then, I found out that a lot of modern economists have had similar doubts and created a whole new branch of economics; behavioral economics. It is aimed at incorporating psychological insights into economic analysis. The backbone of behavioral economics is comprised of psychological biases which in their turn come from the design of our neural system and are inherent to our nature.
Similar to economics, these biases play a crucial role in marketing, management, finance (yes! finance!), personal relationships and any sphere that includes decision-making. Guess what? Everything includes some kind of decision-making!
Not only our thinking and personal decisions are affected by these biases but also the way the entire world works. Huge companies rely on these biases while marketing their products, traders take advantage of people’s biased responses to market fluctuations when doubling their bottom lines, politicians use these biases when creating their election campaigns….
One can hardly imagine how numerous and overwhelming our cognitive biases are. To give you a glimpse of those, here are a few:
- Confirmation bias
Confirmation bias is the tendency to seek for information that confirms our beliefs. In other words, instead of basing our opinions on solid facts, we form an opinion first and then look for evidence to back it up
- Fundamental attribution error
The fundamental attribution error refers to the tendency of attributing situational behavior to one’s personality. For instance, people often attribute poor work performance to laziness when there are so many other possible explanations, such as their rocky home life carrying over to their work life, health issues, exhaustion, lack of motivation, etc.
- The halo effect
The halo effect occurs when one creates a strong first impression which sticks. This can be observed in grading, for example. Frequently, teachers grade a student’s first paper, and if it’s good, they are prone to carry on giving them high marks on future papers even if their performance gets a bit worse. It can be observed at work as well as in personal relationships.
- The horn effect
The horn effect is the opposite of the halo effect. When one performs poorly at first, they can easily get pegged as low-performers even if later on they work hard enough to disprove it.
- The decoy effect
The decoy effect occurs when one believes they have two options, but then, a third option is presented that makes the second one feel better. Suppose, one visits a car lot to consider two cars; one priced $30,000 and the other one $40,000. At first, the $40,000 car seems expensive, so the salesperson shows a $65,000 car. Suddenly, the $40,000 car seems rather reasonable. This salesman is preying on the customer’s decoy bias: the decoy is the $65,000 car that he knows the customer won’t buy.
- Planning fallacy
Planning fallacy is one’s tendency to think that they can complete things more quickly than they actually can. This distorts one’s time management skills and, for procrastinators, this can lead to under-performance
- Affect heuristic
Affect heuristic refers to the tendency to base decisions on emotions. In one study, for instance, participants judged a disease that killed 1,286 people out of every 10,000 as more dangerous than the one that had 24.14% fatality rate(though, in reality, the latter represented twice as many deaths). The image of 1,286 people dying was more vivid and induced an emotional reaction, whereas the percentage failed to create the same mental picture and emotions.
- Conservatism bias
This bias leads people to believe that pre-existing information takes precedence over new information. Don’t be quick to reject something just because it’s radical or different. Great ideas usually are.
Reactance is one’s tendency to react to rules and regulations by exercising freedom; it is a kind of negativism. For instance, employees who are told to follow long lists of strict rules are more likely to take longer breaks, extra sick days or even cheat on their companies.
- Hindsight bias
The hindsight bias refers to one’s inclination to see the event as having been predictable despite little or no objective basis, after an event has occurred.
- Blind spot bias
The blind spot bias is the tendency to see others’ mistakes (including biases) but fail to recognize theirs.
Sound familiar right? So what now? Are we cursed to be the victims of our biases forever?
Well, no, not necessarily. In line with all its faultiness, our brain has also an exceptional ability to alter; it can be trained. The more we understand our biases, the more we can master to control them. How? By maintaining a critical mind, by thinking clearly and being cautious when making assumptions and decisions.