15 Cognitive Biases You Didn’t Know Were Ruining Your Life

|Posted by | Psychology of Money

cognitive-biases

Because of mental shortcuts called cognitive biases, humans have an irrational relationship with money. Here are some ways your cognitive biases might be killing your finances.

We are not as rational as we’d like to think. Because of the way our brains evolved, we have inherited many cognitive biases – shortcuts in how we think and process information – which affect us daily.

Psychologists and researchers have studied many cognitive biases, highlighting the often surprising ways they affect seemingly rational people, and studying how they lead us into an irrational relationship with money.

Here are 15 cognitive biases you didn’t know are secretly messing up your life.

1. Anchoring Bias

The tendency to be over-reliant on the first piece of information you come across.

How you’ve probably encountered it: Marketers show you a high price, then offer a lower price. This makes you more willing to pay the lower price, no matter the actual worth of your purchase.

How it messes you up: Besides making it harder for you to rein in impulse spending, Anchoring Bias can cause you to incur credit card interest fees. Also, during salary negotiations, the party who makes an offer first gains the upper hand in controlling the outcome.

2. Availability Heuristic

You tend to overestimate the importance of the information available to you.

How you’ve probably encountered it: You may have come across someone who swears that smoking it not as dangerous as portrayed, because they have a relative that is remarkably healthy despite being a heavy smoker.

How it messes you up: The availability heuristic can make you ignore proven advice, such as the importance of having emergency savings. Conversely, when a product or service is advertised as solving a particular problem, the act of highlighting the problem can cause you to attach greater importance to it than you normally would. Which, in turn, makes you more willing to consider the purchase.

bandwagon-effect

3. Bandwagon Effect

The more people hold a belief, the more likely it is for someone to adopt that belief.

How you’ve probably encountered it: Think back to every meeting you’ve ever attended that resulted in disaster. Even though you saw it coming, you somehow went along with it.

How it messes you up: Are you struggling to lose weight, eat healthier, or spend wisely? Check the attitudes of the people you spend the most time with. Chances are, you’re subconsciously mirroring the prevalent beliefs and attitudes of the group, thereby sabotaging your efforts.

4. Blind Spot Bias

Failing to notice or recognise your own cognitive biases.

How you’ve probably encountered it: That one friend that calls everyone out for falling prey to sales gimmicks, yet never seem to acknowledge when they do that exact same thing themselves? Blind spot bias in action.

How it messes you up: Failing to recognise your biases means you’ll never be able to escape their effects, for better or worse. Certain habits, such as saving money, require you to stop yourself from acting on your biases. This is impossible to do if you do not recognise your own biases in the first place.

shopping-during-a-sale

5. Choice-supportive Bias

Once you have made your choice, you tend to feel positively about it, even if your choice has demonstrable flaws.

How you’ve probably encountered it: Remember how you kept defending that ex as “passionate and spontaneous”, even when all your friends were getting sick and tired of her messing up everyone’s plans?

How it messes you up: Questionable dating choices aside, choice-supportive bias causes you to waste time and energy defending an awkward purchase or bad decision, and can rob you of future opportunities.

6. Clustering Illusion

The tendency to see patterns in random, unrelated occurrences.

How you’ve probably encountered it: That auntie that insists on spending S$100 on a TOTO ticket from that out-of-the-way corner shop because “the last three winning tickets were bought from there”.

How it messes you up: This is among the key cognitive biases that fuels a gambling addiction. Even if you don’t gamble, clustering illusion can cause you to draw false conclusions and prevent you from learning vital truths about the world around you.

confirmation-bias

7. Confirmation Bias

Only accepting and listening to viewpoints that align with your preconceived notions.

How you’ve probably encountered it: Had a conversation about gay marriage lately? How’d it go?

How it messes you up: Confirmation bias can make it difficult to change habits that are damaging to your health, finances or career. Because our behaviours are guided by our beliefs, not examining or challenging our closely held beliefs causes us to repeat unhelpful habits.

8. Ostrich Effect

The decision to ignore dangerous or negative information, burying one’s head in the sand like an ostrich.

How you’ve probably encountered it: That colleague who bemoans losing money in the stock market because she “didn’t see the danger until it was too late.”

How it messes you up: Traders have been seen to check their stocks less often during economic volatility, when they should be doing the exact opposite. Singaporeans who invested in CPFIS reaped fewer returns than those who did not invest. In short, the Ostrich Effect makes it hard for you to take appropriate remedial action, increasing your risks of suffering financial losses.

outcome-bias

9. Outcome Bias

Retroactively judging a decision based on the outcome.

How you’ve probably encountered it: You gambled all your ang pow money and won big that one year. Hence, the decision to risk everything was a good one.

How it messes you up: The truth is, you got lucky that one time. That does not mean it’s a good decision to gamble away the money you are given every year. Not recognising this bias means you are likely to keep risking your bonus money, when it would be far wiser to invest it.

10. Overconfidence Effect

We tend to overestimate our ability to do things or accomplish tasks

How you’ve probably encountered it: One of the most extreme (and hilarious) examples of how this bias is used in consumerism is perhaps the Axe body spray commercials.

How it messes you up: Marketers cleverly leverage this cognitive bias to sell you products which promise to magically turn you into a better version of yourself. They’re simply puffing you up, making you believe you can easily achieve your goals, while selling you something that may or may not help you do it.

looking-presentable-at-work

11. Recency Bias

The tendency to give more weight to newer data, and diminish in importance older information.

How you’ve probably encountered it: After being introduced to a group of new people in quick succession, you only remember the last few names.

How it messes you up: No, you aren’t losing your short-term memory. The recency bias is simply how our brains work – we tend to remember the last few items on the list, and also ascribe more importance to them. This bias can trip you up when you need to look after a long list of tasks, or if you need to make decisions across a wide time period.

12. Salience

This bias causes you to focus on the most recognisable features of a person or concept.

How you’ve probably encountered it: Remember those billboard ads featuring professionally staged photographs, with the caption “Shot on an iPhone 6”?

How it messes you up: By triggering the salience bias, marketers control how you perceive their products and services. This prevents you from calmly weighing the pros and cons of your purchase, which could lead to a bad purchase. In the above example, the iPhone 6 may take great photos, but it’s got poor battery life and relatively small storage capacity. This may be problematic to a mobile photography enthusiast.

selective-perception

13. Selective Perception

Allowing our expectations to influence our perception of the world.

How you’ve probably encountered it: Feeling proud when your soccer team won the championships, and thinking that the referees sucked when your team didn’t.

How it messes you up: The selective perception bias pre-disposes us to overlook flaws when dealing with a brand we feel an affinity with. This disadvantages up by making us more willing to accept unfavourable deals. It also makes us more vulnerable to sales campaigns from our favourite brands.

14. Stereotyping

A survival trait, this bias causes you to expect certain qualities or behaviour from a group or certain individuals, without any prior experience.

How you’ve probably encountered it: C’mon, do you really need an example here?

How it messes you up: Stereotyping is a natural subconscious process that evolved to help us quickly and safely navigate our environment. However, we tend to overuse and abuse it, which causes us to miss opportunities or make unfavourable and/or irrational decisions.

15. Survivorship Bias

A cognitive bias that causes you to focus on successful or surviving examples, which in turn makes you misjudge a situation.

How you’ve probably encountered it: Every time you’ve underestimated the effort, time and resources it took to accomplish a task or goal.

How it messes you up: By focussing only on the successful examples, we form an unrealistic view of our chances of success. This could make you waste precious time on a wild goose chase.

Don’t Let Your Cognitive Biases Choose Your Credit Cards

Now that you’re aware of (some of) the cognitive biases that are secretly running things in the background, you can take steps to lessen – if not overcome – their influence on your decisions.

Wherever possible, make use of comparison tools to help you cut through the marketing strategies that try to trigger your cognitive biases.

Use SingSaver.com.sg’s free credit card comparison tool to bypass cognitive biases and quickly find the best credit card for you.

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Alevin ChanBy Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.