10 Cognitive Biases in Your Brain That Are Costing You Money
Below is a list of the top 10 types of cognitive bias that exist in behavioral finance.
Because humans typically don't like change, there's also a money bias called the status quo bias. This is the preference to keep your financial status as-is in order to avoid a change of any kind. ... You don't want to get too aggressive; you'd rather stay status quo.
While there are literally hundreds of cognitive biases, these seven play a significant role in preventing you from achieving your full potential:
Three types of bias can be distinguished: information bias, selection bias, and confounding. These three types of bias and their potential solutions are discussed using various examples.
Here are eight common biases affecting your decision making and what you can do to master them.
25 Cognitive Biases - "The Psychology of Human Misjudgment"
1. Confirmation Bias. One of the most common cognitive biases is confirmation bias. Confirmation bias is when a person looks for and interprets information (be it news stories, statistical data or the opinions of others) that backs up an assumption or theory they already have.
Human beings tend to incorporate unconscious and cognitive bias in just about every step of their decision-making processes. These biases tend to lead to systematic deviations from rationality, and often result in drastic oversimplifications in the way that we make decisions; which are known broadly as heuristics.
Information-processing biases include anchoring and adjustment, mental accounting, framing, and availability. Emotional biases include loss aversion, overconfidence, self-control, status quo, endowment, and regret aversion.
Common biases include: Overconfidence and illusion of control. In short, it's an egotistical belief that we're better than we actually are. It can be a dangerous bias and is very prolific in behavioral finance and capital markets.
An emotional bias is a distortion in cognition and decision making due to emotional factors. ... to believe something that has a positive emotional effect, that gives a pleasant feeling, even if there is evidence to the contrary; to be reluctant to accept hard facts that are unpleasant and give mental suffering.
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