Cognitive Biases

“Mind plays mysterious games!!!” – we say this all the time … I say this all the time to explain certain idiosyncrasies in my decision making .. Now, I found the term psychologists use for it … “Cognitive Biases” … They use it to describe a whole bunch of irrational things that we do on an everyday basis… It comprises of a whole lot of different types … I’ll briefly try to describe some of them below – All I want you to take away from this article is – we all suffer from these biases in some form or the other and to some level or the other … Just be aware of it and try to minimize its effect in critical decision making activities in your life ….  Also note that a good salesman always plays on these biases, so watch out before you impulsively decide on something {A more comprehensive list of these can be found on Wikipedia at - http://en.wikipedia.org/wiki/List_of_cognitive_biases}

OK, here we go .. Following are some of the important ones …

1. Herd Mentality Bias – This is when you go ahead and buy Yahoo stock at $126 per share just because all of your friends are buying that stock at that price … Thinking out of the group takes a lot of courage and confidence. Try to justify your decisions with facts and not on hearsay …
2. Sunk Cost Effect – This is when you keep the Yahoo stock as it slides from the high of $126 per share to the low of $14 per share … Once you have purchased the shares, most folks get attached to their investment and try to justify their investment as they slide down the curve by saying – hey man, I sunk in so much of my money into it ; I’ll stick with it till the end…
3. Anchoring Bias – This is the bias a car dealership is evoking in you by always placing an MSRP ticket on the car .. This price becomes an anchor that they start negotiating from!!! That is the reason we take another piece of paper in our hand that has the car invoice number for us try to anchor him to our number and negotiate from there. Also, note that employers use this one a lot by asking the new hire about their “expected salary” – This is an anchor so do your research before write that number down.
4. Overconfidence Bias – This is when we say “I’m 99% sure that …” Most of the time we have no clue of the actual probability of our cocksureness but we use the 99% value nonetheless. 
5. Availability Bias – This is when you make decision based only on the only available information. The media plays on this very well – Only those stocks that are covered by the media get more attention from us … Why? Availability of information, that’s why?
6. Correlation Bias – This is when I knock on wood or cross my fingers when I wish to bestow certain continuity to a lucky streak; knowing fully well that there is no correlation between knocking on the wood or crossing my fingers and my good luck streak to continue …
7. Confirmation Bias – This is when I only pay attention to the articles that say “Yahoo stocks will rise again” and pay a blind eye to all of the other articles that provide arguments to the opposite. You may have said this to someone – “He hears what he wants to hear” .. Its confirmation bias … 
8. Hindsight Bias – Also know as “I knew it all along”-bias … This is when we try to justify everything assuming the unfolding events were all a part of your plan .. 
9. “Not-Invented here”-Bias – This is when you say to your colleague – I like what you have done bit I think I like to this thing “my way”!!! 
10. Self fulfilling prophecy – This is when you say “I’m going to have a great day” and that mind set really makes the day go well … This is the reason the positive affirmations/attitude help uplift our life… The problem is that when folks think negative thoughts - they manifest into negative reality as well ...

Once again - The takeaway message here is – Understand that as humans we are irrational and try to understand some root causes of the irrationality and try to minimize it in your life …..

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