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What I'm reading #29: 45 cognitive biases of today's world

By Sam Instone - July 22, 2022

Cognitive biases make us human.

They're systematic errors that occur when our brains process information. 

They're unconscious and automatic...

And can impact the way we live, work...and invest. 

As we journey through this increasingly complex and changing world, it's natural for us to unconsciously adopt new patterns of behaviour. 

But having awareness of the many biases that exist, can help you make more informed decisions, personally and financially. 

Increasing your self-awareness helps you become the best version of yourself. 

(Something my coach Mick has taught me a lot about).

So, here's a list of 45 (yes 45, there are actually more!) biases that have a tendency to show up in our lives every day. 

Which are you prone to exhibiting? 

  1. Fundamental Attribution Error - We judge others on their personality or fundamental character, but we judge ourselves on the situation.

    E.g. - Alice is late to work; she's lazy. You're late to work; it was a bad morning. 

  2. Self-Serving Bias - Our failures are situational, but our successes are our responsibility.

    E.g. -“Every time we say yes to a request, we are also saying no to anything else we might accomplish with the time.”

  3. In-Group Favouritism - We favour people who are in our in-group as opposed to an out-group.

    E.g. - Andrew is in your sailing club, so you like Andrew more than John. 

  4. Bandwagon Effect - Ideas, fads, and beliefs grow as more people adopt them.

    E.g. - Charles believes DIY investing is better than investing in the stock market. Andrew does too. 

  5. Groupthink - Due to a desire for conformity and harmony in the group, we make irrational decisions, often to minimise conflict.

    E.g. - Charles wants to buy shares in Tesla. Andrew wants to buy Bitcoin. You suggest an equal quantity of both. 

  6. Halo Effect - If you see a person as having a positive trait, that positive impression will spill over into their other traits. (This also works for negative traits).

    E.g. - "My adviser could never lie; he takes me to play golf!"

  7. Moral Luck - Better moral standing happens due to a positive outcome; worse moral standing happens due to a negative outcome.

    E.g. - "X culture won X war because they were morally superior to the losers."

  8. False Consensus - We believe more people agree with us than is actually the case.

    E.g. - "Everyone thinks that!"

  9. Curse of Knowledge - Once we know something, we assume everyone else knows it, too.

    E.g. - Julia is a CEO and struggles to understand the perspective of her new directors.

  10. Spotlight Effect - We overestimate how much people are paying attention to our behaviour and appearance.

    E.g. - John is worried everyone's going to notice how much he panics when we enter a bear market.

  11. Availability Heuristic - We rely on immediate examples that come to mind while making judgments.

    E.g. - When trying to decide which restaurant to visit, you choose the one you most recently saw an advert for. 

  12. Just-World Hypothesis - We tend to believe the world is just; therefore, we assume acts of injustice are deserved.

    E.g. - Andrew lost a lot of money investing in Crypto because he was mean to his co-workers and had bad karma. 

  13. Naïve Realism - We believe that we observe objective reality and that other people are irrational, uninformed, or biased.

    E.g. - "I see the world as it really is. Others don't".

  14. Naïve Cynicism - We believe that we observe objective reality and that other people have a higher egocentric bias than they actually do in their intentions/actions.

    E.g. - "The only reason this person is doing something nice is to get something out of me."

  15. Forer Effect (aka Barnum Effect) - We easily attribute our personalities to vague statements, even if they can apply to a wide range of people.

    E.g. - "This horoscope is so accurate!"

  16. Dunning-Kruger Effect - The less you know, the more confident you are. The more you know, the less confident you are.

    E.g. - Not possessing the skills needed to recognise your own incompetence or lack of knowledge. Your poor self-awareness leads you to overestimate your own capabilities.

  17. Anchoring - We rely heavily on the first piece of information introduced when making decisions.

    E.g. - "Gold is up more than it's ever been. It must be a great asset to invest in."

  18. Automation Bias - We rely on automated systems, sometimes trusting too much in the automated correction of actually correct decisions.

    E.g. - Your phone auto-corrects "its" to "it's", so you assume it's right. 

  19. Google Effect (aka Digital Amnesia) - We tend to forget information that’s easily looked up in search engines.

    E.g. - We do not commit certain information to our memory because we know that this information is easy to access online.

  20. Confirmation Bias - We tend to find and remember information that confirms our perceptions.

    E.g. - Investors focus only on information that reinforces their opinions about an investment.

  21. Backfire Effect - Disproving evidence sometimes has the unwarranted effect of confirming our beliefs.

    E.g. - Introducing people to negative information about a political candidate that they favour often causes them to increase their support for that candidate.

  22. Third-Person Effect - We believe that others are more affected by mass media consumption than we ourselves are.

    E.g. - "You've clearly been brainwashed by the media!"

  23. Belief Bias - We judge an argument’s strength, not by how strongly it supports the conclusion but by how plausible the conclusion is in our own minds.

    E.g. - Julia mentions her supporting theory about your conspiracy theory, which you adopt wholeheartedly despite the fact she has very little evidence for it. 

  24. Declinism - We tend to romanticise the past and view the future negatively, believing that societies/institutions are by and large in decline.

    E.g. - "In my day, kids had more respect!"

  25. Status Quo Bias - We tend to prefer things to stay the same; changes from the baseline are considered to be a loss.

    E.g. - Even though an app's terms of service invade Alice's privacy, she'd rather not switch to another app. 

  26. Sunk Cost Fallacy (aka Escalation of Commitment) - We invest more in things that have cost us something rather than altering our investments, even if we face negative outcomes.

    E.g. - “I’ve invested so much into this business venture that I might as well keep pouring money into it.”

  27. Gambler’s Fallacy - We think future possibilities are affected by past events. 

    E.g. - Julia has now lost nine coin tosses in a row, so she's sure to win the next one.

  28. Zero-Risk Bias - We prefer to reduce small risks to zero, even if we can reduce more risk overall with another option.

    E.g. - "You should probably buy the insurance."

  29. Outgroup Homogeneity Bias - We perceive out-group members as homogeneous and our own in-groups as more diverse.

    E.g. - Alice is not a financial planner, but she believes "all financial planners are the same."

  30. Authority Bias - We trust and are more often influenced by the opinions of authority figures.

    E.g. - "My CEO told me this was fine."

  31. Placebo Effect - If we believe a treatment will work, it often will have a small physiological effect.

    E.g. - Alice was given a placebo for her pain, and her pain decreased. 

  32. Survivorship Bias - We tend to focus on those things that survived a process and overlook ones that failed.

    E.g. - The chance of an investor making a misguided investment decision, based on published investment fund return data.

  33. Tachypsychia - Our perceptions of time shift depending on trauma and physical exertion.

    E.g. - "When the car almost hit me, time slowed down..."

  34. Law of Triviality (aka “Bike-Shedding”) - We give disproportionate weight to trivial issues, often while avoiding more complex issues.

    E.g. - Rather than figuring out how to help the homeless, a local city government spends a lot of time discussing putting in a bike road and bike sheds. 

  35. Zeigarnik Effect - We remember incomplete tasks more than completed ones.

    E.g. - Andrew feels guilty for never getting anything done until he sees all of the tasks he's checked off on his task list. 

  36. IKEA Effect - We place a higher value on things we partially created ourselves.

    E.g. - "Don't you love this old chest I spent £50 on? I restored it myself!"

  37. Ben Franklin Effect - We like doing favours; we are more likely to do another favour for someone if we’ve already done a favour for them than if we had received a favour from that person.

    E.g. - Andrew loaned Charles a pen. When Charles asked to borrow £5, Andrew did it readily. 

  38. Bystander Effect - The more other people are around, the less likely we are to help a victim.

    E.g. - In a crowd, no one called 999 when someone got hurt in a fight. 

  39. Suggestibility - We, especially children, sometimes mistake ideas suggested by a questioner for memories.

    E.g. - We may recall a dentist visit as being uncomfortable yet manageable. Suppose another person describes how horrible they imagined our dentist appointment was. Based on this discussion, we may alter how we remembered our experience at the dentist, and then later postpone a necessary appointment because of this warped memory.

  40. False Memory - We mistake imagination for real memories.

    E.g. - Andrew is certain Alice made a funny joke about the weather when that joke actually came from a TV show. 

  41. Cryptomnesia - We mistake real memories for imagination.

    E.g. - Perhaps you tell a friend, “Hey, I have an idea, let’s go to this new restaurant for dinner.” And then your friend says, “Yeah … I said we should do that a week ago.” You might be certain the idea was yours when in reality, you had a lapse in memory.

  42. Clustering Illusion - We find patterns and “clusters” in random data.

    E.g. - John decides to put his money into a mutual fund with an above-average performance recently in relation to the S&P 500, on the assumption that the fund manager will continue to generate above-average returns going forward.

  43. Pessimism Bias - We sometimes overestimate the likelihood of bad outcomes.

    E.g. - "Nothing will ever get better."

  44. Optimism Bias - We sometimes are over-optimistic about good outcomes.

    E.g. - Charles believes that he will live longer than the average, that his children will be smarter than the average, and that he will be more successful in life than the average.

  45. Blind Spot Bias - We don’t think we have bias, and we see it in others more than ourselves.

    E.g. - When doctors receive gifts from pharmaceutical companies, they tell others that these gifts do not affect their decisions about what medicine they prescribe. However, suppose you ask them whether a gift might unconsciously bias the decisions of other doctors. In that case, most will agree that other physicians are unconsciously biased by gifts while continuing to believe that their own decisions are not.

Many of the above can hamper our investment performance in the most destructive way.

Understanding our cognitive biases is fundamental to lowering risk and improving investment returns over time. 

The good news is, however, there’s almost always room for us to make improvements and cure behavioural biases…

With knowledge, comes freedom.

Understand what may be standing in the way of your good decision-making.

Doing so can ensure you stay on the right course.

And make this year your most successful one yet.


Further reading

The world’s best stock market tip

What I'm reading #28: Do you have internal or external success?

How to transfer your Shell pension (Shell Overseas Contributory Pension Fund/SOCPF)

How to maximise your stock market returns

2022: A review at halftime

Save and invest for a better life