Cognitive Biases

Can you dodge cognitive bias?

Most Likely not. The human mind seeks effectiveness, which means that much of the reasoning we use to conduct our daily choice-making depend on nearly automatic processing. But researchers Trusted Source think we can get better at recognizing the situations in which our biases are likely to operate and take steps to uncover and correct them. Here’s how to mitigate the effects of bias:

  • Learn. Studying cognitive biases can help you recognize them and counteract them.
  • Question. If you are in a situation where you know you may be susceptible to bias, slow your decision-making.
  • Collaborate. Assemble a diverse group of contributors with varying areas of expertise and life experience to help you
  • Remain blind. To cut down on the chances that you will be affected.

Some of them to keep in mind

Overconfidence Bias
Overconfidence results from someone’s false sense of their skill, talent, or self-belief. It can be a risky bias and is very prolific in behavioral finance and capital markets. The most common signs of arrogance include the sense of control, timing optimism, and the desirability effect. (The desirability effect is the belief that something will happen because you want it to.)

Dunning-Kruger effect
Psychologists describe this bias as the inability to recognize your own lack of competence in an area. Research has shown that some people express a high degree of confidence about something they are not very experienced at doing. This bias exists in all sorts of areas.

Actor-observer bias
Actor-observer bias is a difference between how we explain other people’s actions and how we explain our own. People tend to say that another person did something because of their character or some other internal factor. People usually attribute their own actions to external factors like the events they were in at the time.

Self Serving Bias
Self-serving cognitive bias is the tendency to attribute positive outcomes to skill and negative outcomes to luck. In other words, we attribute the cause of something to whatever is in our own best interest. Many of us can recall times that we have done something and decided that if everything is going to plan, it’s due to skill, and if things go the other way, then it’s just bad luck.

Herd Mentality
Herd mentality is when investors recklessly copy and follow what other legendary investors are doing. When they do this, they are being influenced by emotion, rather than by unbiased analysis.

Loss Aversion
Loss aversion is a tendency for investors to be afraid of losses and avoid them more than they focus on trying to make gains. Many investors would rather not go down USD 2,000 than earn USD 3,000. The more losses one encounters, the more loss cautious they likely become.