Even if we tend to believe that we are making decisions that are mainly rational, today’s psychological insights are thwarting our calculations.
If that was indeed the case, a larger part of the population would drive a Volvo.
In fact, Volvo translates exactly to what a car should do: it carries a person safely from one place to another.
It is not for nothing that “Volvo” in Latin means “I roll”.
Still, many people buy cars that are more expensive.
In the end, these cars serve the same purpose but are being bought for entirely different emotional reasons.
This initial example should help you understand that humans are not primarily rational beings.
Our brain uses processes and abbreviations that allow for quick actions in everyday life.
In return, however, this is accompanied by a high susceptibility to errors.
These irrational errors of thought are called cognitive biases.
Do Cognitive Biases Equal Irrational Errors of Reasoning?
Every day we have to defend ourselves against a huge flood of information.
We perceive so many sensory influences that not all parts of our brain are able to process them adequately.
That’s why our brain uses shortcuts – also called heuristics.
The rapid processing of information is the basis for our everyday functioning.
Thus, we maneuver safely through everyday life, without having to think about every little detail.
The vast majority of our information processing is controlled by unconscious routines.
This prevents us from permanently overloading ourselves cognitively.
The problem with our unconscious habit of using routine heuristics is that there are certain systematic distortions.
Especially as an entrepreneur and self-employed with great responsibility, we want to get tricked by ourselves as seldom as possible.
That’s why I’ve put together a selection of cognitive biases and unconscious thinking errors.
Just imagine the following scenario:
The winners of a lottery ticket get a lot of attention in the media.
This makes us think that such wins are more common, while in reality, they are very rare.
This single incident is enough to convince us to buy a lottery ticket for ourselves.
The so-called Availability bias is a mental shortcut that allows us to understand the world based on the immediate information that comes to mind.
We tend to remember rarer events than ordinary ones.
Therefore, quick decisions are based on an overestimation of the frequency of some dramatic and vivid incidents that are easier to recall.
So far so good. Why is that a problem?
Everyone thinks he can become a bitcoin millionaire or set up the next Facebook just because he has seen it in the media more often recently.
Closely related to this is what is called a ‘turkey illusion’.
Suppose we want to imagine a turkey being fed and fattened every day.
Any feeding will strengthen the turkey’s conviction that people are well-disposed to it without expecting anything in return.
But then something unexpected happens.
As commonly known, Americans have a special day of the year called Thanksgiving.
Considering the most popular Thanksgiving meal, it does not look good for the turkey anymore and it’ll have to change its mind.
In short, we can not determine on the basis of the known properties of the future. A classic mistake.
In fact, our human brains are anticipation machines that always rely on the past to build the future.
Be aware of that!
Most of the times emotions guide our decisions instead of rationality.
Let us illustrate that with an example again.
There are two hypothetical scenarios:
1) First, you will receive 1000$. Second, you need to decide if you want to accept another 500$ or you want to have the 50% chance to win another 1000$.
2) You get 2000$ first before you can choose if you want to take a loss of 500$ or if you want to take a 50/50 risk to lose 1000$.
In both cases, the safe option yields 1,500$ and the risky option equals 1,000$ or 2,000$ respectively.
In purely rational terms, we would make the same choice in both scenarios.
This is not the case.
For the first scenario, most people choose a safe bet. However, in the second case, most people gamble.
Our irrational behavior has three underlying reasons
a) Loss Aversion
We fear losses more than we estimate
b) orientation at the reference point.
The fact that in our example it starts at 1000$ or 2000$, has an impact on how we assess our chances.
c) The perceived value does not have to correspond to the objective value
Although the perceived value decrease from 1000$ to 500$ is equal to the decrease from 2000$ to 500$, we perceive the latter as more intense.
Loss aversion refers to our tendency to avoid losses rather than chasing profits when making a decision.
According to research studies, the psychological effect of loss is twice as much as profit.
Even if the monetary value of the loss and the gain is the same, we will tend to attach greater importance to the loss.
In other words, people feel the pain that loss accompanies more than the pleasure that comes with gain.
As a result, people end up taking more risks to avoid losses, even if it means they are in a potentially worse position than before.
That is, next time you make an investment in whatever form, remember that you’re likely to be more worried about losing.
At the same time, the chance of success can be just as high.
To avoid this distortion, it is always important to think long term.
Try to look at the bigger picture and the consequences that can follow.
Quick decisions are bad decisions.
Imagine the following situation:
Your customer lets you know “I was almost completely satisfied with the product.”
Are you rather concentrating on the praise or the little “almost” that comes along?
Negativity bias refers to our tendency to take negative events more into account when compared to positive ones (with equal intensity).
Our human ancestors had to pay special attention to life-giving things, such as shelter, food, and reproduction in order to ensure their survival.
More importantly, it was to get away from things that could threaten life (predators, malnutrition, and other people’s aggression).
These things have a higher urgency from an evolutionary point of view.
Thus, those who behave more cautiously had higher chances of survival and thus, have reproduced more often.
Many thousands of generations later, our brains are still looking for threats to survival rather than looking at the positive aspects of life.
The only psychologist ever to win a Nobel Prize, Daniel Kahneman, even found that in intimate relationships, the rate of positive to negative events must be at a 5: 1 rate to make up for a negative event.
“This 50 bucks T-shirt is too expensive.”
“You are lucky enough. Only today you can get this piece for a 20% discount. “
“That sounds even better. If I can get a discount for T-shirt worth 50$, I made a good deal. “
Although this fictional scene is simplified, it is a phenomenon that has happened to us all before.
We have a tendency to rely heavily on the first information we receive.
Any decisions or evaluations we make are influenced by this “anchor”, which becomes our point of reference.
We tend to adapt our decisions only from this reference point.
The reason why we have difficulty predicting our future feelings is that our point of reference is our current emotional state.
The first impression or perception we make of everything remains our anchor, no matter how much we claim to analyze all possible factors in the decision.
The anchor effect affects the amount we pay for products.
In the given example, the person bought a 50$ shirt only after being told she could get it for 40$.
Because the anchor price of 50$ was used as a reference point, the deal actually looks pretty good to the customer.
Another classic model commonly used is second-degree price discrimination.
This model states that there is always a more expensive offer, which sets the anchor so that the average, “medium” offer seems more attractive.
“The human understanding when it has once adopted an opinion (either as being the received opinion or as being agreeable to itself) draws all things else to support and agree with it.” – Francis Bacon
Confirmation bias describes our tendency to interpret situations in ways that validate our own long-standing beliefs.
Interestingly, it feels like we are using a rational approach, but in reality, we only test and confirm what we already believe we know.
We tend to prioritize all the information that complement our view and reject alternatives.
We strive to seek such evidence and give it great importance.
The confirmation error greatly affects how people collect, analyze, and retrieve information.
Our thinking becomes automatically selective.
We surround ourselves with people who agree with our views.
So in the truest sense of the word, it is a statement that, as a result, no longer allows you to question your ready-made opinions.
We have a very strong desire to be consistent in our words with our actions.
Let’s look at the following study:
When people watched a thief steal a radio from the neighbor’s towel on the beach, only 20% responded.
However, in a variation of this experiment other people were asked by the owner to take care of things.
In this scenario, 95% of people responded to this theft and tried to prevent it.
The desire to be constant in terms of what has been said to have trumped their concerns about personal safety.
But what makes this need for constancy?
The answer is commitment.
In social psychology, cognitive dissonance refers to an emotional state that is perceived as unpleasant.
This state is arising from the fact that a person has several cognitions at one and the same time:
Perceptions, thoughts, opinions, attitudes, wishes or intentions – which are incompatible.
Cognitive dissonance occurs, among other things,
- if you have made a decision that subsequently turns out to be a wrong decision
- when one realizes that a started thing is more strenuous or unpleasant than expected
- if you’ve gone to great lengths, only to find that the goal does not live up to expectations
- if you behave contrary to your beliefs
Research shows that once we have committed ourselves to anything, we also want to keep our promise and remain constant.
A public promise is, therefore, a very powerful motivator.
Also, a series of social-psychological experiments show the huge effects of cognitive dissonance:
If someone is made to write an essay or fill out a questionnaire in which he should argue against his political views and then fill in the same questionnaire in two weeks, their opinion has shifted radically.
FOMO (Fear Of Missing Out)
There are at least 10 books left in my bookshelf.
So far, I have not read any of them until the end.
There are 7 projects that I try to manage at the same time, 3 sports and too many more interests – but I do not want to let go of any of it.
This whole dilemma is also called FOMO (fear of missing out).
Fear of missing out, or FOMO, is “a pervasive apprehension that others might be having rewarding experiences from which one is absent”. “This social anxiety is characterized by “a desire to stay continually connected with what others are doing”. – Wikipedia
We are almost paralyzed by the overwhelming power of possibilities.
On the other hand, we also do not want to give up any of the options.
Why is that?
As long as you do not decide, everything remains possible – in your mind at least.
As long as you do not commit yourself, there is literally a multiverse of infinite possibilities.
However, the minute you choose something, all the other options break (in the short term) and you find yourself in the desert of reality instead.
On the other hand, it is nothing more than a dream world.
The Paradox of Choice
In our affluent society, we face an endless array of opportunities every day.
From the clothes, we wear to the selection of our lunch.
Choosing this option gives us the feeling of freedom.
At least we believe that.
In psychology, this is called the paradox of choice.
This completely turns this widespread belief on its head.
Instead, this paradox claims that the plethora of choices put us in psychological distress and makes it incredibly hard for us to choose at all.
If we have made decisions, the existence of all the other remaining options can make us rather unhappy.
Every second of our lives we make decisions and in each case, there are also alternatives that have different consequences.
This increases the pressure for the “right” decision and its subsequent consequences.
The decision becomes a huge responsibility and burden.
It is not for nothing we call it spoiled for choice.
Closing thought: Irrational Decision Making
Now you know the most common flaws that underlie our allegedly “rational thinking” processes.
As you have made it read up until here, you made one important step in the right direction.
By being aware of widespread thinking fallacies, you are able to detect contradictions of your thoughts yourself.
Of course, it takes some practice and you will definitely not be able to avoid faulty thinking all of the time.
However, by frequently monitoring your thoughts and according to behavior, you get better at noting such situations of irrational thinking.
This may help you a lot in order to improve your reasoning skills eventually.
Did you already know about this common biases? How do you protect yourself from faulty thinking?
Let me know in the comments below!
Thanks for reading folks.