The Cognitive Bias Alphabet

Cognitive biases are all around us. They shape the way every human being perceives the world. Here’s one to be aware of for each letter of the alphabet.

Anchoring – The tendency to rely too heavily on one trait or piece of information when making decisions. Think about how you are influenced by other peoples’ answers in a guessing game.

Bias Blind Spot – The tendency to see oneself as less biased than other people. Being aware of these biases doesn’t make you any less-so.

Curse of Knowledge – When better informed people find it increasingly difficult to see problems or issues from the perspective of those less informed. Sometimes, ignorance is bliss.

Disposition Effect – The tendency to sell an asset which has risen in value and resist selling an asset which has fallen in value. You’d think people would want to hold onto assets of more value, right?

Empathy Gap – The tendency to underestimate the power of emotions and feelings, either in oneself or others. The head nods, yet it is the heart that loves.

Framing Effect – Drawing different emotional reactions from the same information, depending on how that information is presented. For some, the glass is half full. For others, it is half empty.

Gambler’s Fallacy – The tendency to think future probabilities are in some way altered by past events. If I flip heads five times in a row, does that in any way impact the odds of the next coin-flip? The conditions are exactly the same each time.

Hindsight Bias – The tendency to see past events as inevitable after the fact. Where were you at the time?

IKEA Effect – Placing a disproportionately high value on something you built or assembled yourself, such as IKEA furniture. Our efforts should count for something after all.

Judgement Bias – Judgements formed by the emotional response to a subject, despite a lack of supporting evidence.

Kindness Bias – This occurs when our efforts to be kind result in making choices for other people, inadvertently taking away their own choices.

Loss Aversion – The tendency to place greater importance on avoiding losses than acquiring gains, despite our best interests. This is why people see cash as security, despite the evidence of inflation.

Money Illusion – The tendency to concentrate on the face value of money, rather than its relative purchasing power. Your money is only worth the things you can exchange it for, just as your assets are only worth what somebody is willing to pay for them.

Negativity Bias – A psychological phenomenon by which people have a stronger recollection of negative experiences than of positive experiences. Fear is a powerful thing, isn’t it?

Optimism Bias – The tendency to be over-optimistic, greatly underestimating the probability of undesirable outcomes. The ‘that will never happen to me’ approach.

Projection Bias – The tendency to overestimate how much our future self will share the same preferences, thoughts and values as our current self, often leading to sub-optimal outcomes. It seemed like such a great idea at the time!

Question Order Bias – The tendency for people to react differently to a series of questions, depending upon the order in which they are posed.

Risk Compensation – The propensity to take greater risks when perceived safety increases. Cyclists and helmets spring to mind (*runs for cover*).

Survivorship Bias – The tendency to focus on things that survived a particular process, whilst overlooking those that didn’t due to lack of visibility. Think investment management marketing – you’ll never hear about the funds that failed.

Time-Saving Bias – Underestimating the time saved by accelerating from low speed, whilst overestimating time lost when decelerating from high speed. So why everyone is so impatient on the road?

Unit Bias – A standard serving of food is deemed to be appropriate, even if it is too much or too little for that particular individual. Seems we’re happy to get what we’re given.

Voluntary Response Bias – Results of studies or surveys are skewed by voluntary participants, who generally hold stronger opinions about the subject matter. The result is that these results do not accurately reflect the general population.

Well Travelled Road Effect – Underestimating the time of a frequently taken journey, compared to a route being travelled for the first time. Always seems quicker on the way home, doesn’t it?

Youth Bias – The tendency to think the most significant events in our lives happened during childhood.

Zero-Sum Bias – Incorrectly viewing a situation as a zero-sum game, where one person must lose in order for another to benefit. People often view wealth as a zero-sum game.

In my role as a financial planner, I take great care to understand and appreciate the unavoidable traits and foibles of human nature. Many of these are heightened by our emotional connection to money and nobody is immune to their own biases. They have been ingrained into our psyche over millions of years of evolution. Even those who have spent entire careers discovering and understanding these biases are susceptible.

However, studying these biases can go a long way towards truly understanding and empathising with the people around us. Who knows, you may even spot some of these in yourself. After all, our biases make us human, and I’m just fine with that.

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