Wednesday, 16 December 2015 10:26

Cognitive Basis

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We are all rational people, right? Well maybe not. I have recently seen some very poor decision-making by people who should know better. This got me thinking; why do reasonable and rational people often make such foolish decisions?

 

Anchor Basis

 

People are over-reliant on the first piece of information they hear. This is very important in negotiations where whoever makes the first offer establishes the range of possibilities.

 

Availability Heuristic

 

People overestimate the importance of information that is available to them. For example someone who says drinking binges are not bad for you may say it because they know an alcoholic who lived to be 100.

 

Blind Spot Bias

 

Failing to recognise your own cognitive biases is bias in itself.

 

Choice-supportive Bias

 

When you make a decision you tend to feel positive about it despite the choice flaws.

 

Confirmation Bias

 

Listening to information that only supports your preconceptions. This is one reason it is hard to have a sensible conversation with people who hold fixed dogmas about global warming, for example.

 

Clustering Illusions

 

The tendency to see patterns in random events, hello conspiracy theorist. Very common in the casino on the roulette wheel.

 

Ostrich effect

 

The decision to ignore negative information. This is commonly seen in investors who check the value of stocks less in bad markets.

 

Outcome Bias

 

Judging your decision based on the outcome, just because you got home driving drunk doesn’t mean it was a wise choice in the first place.

 

Recency

 

The tendency to weigh the latest information more heavily than long-term data. Investors will often weigh information from today too heavily to make long-term decisions.

 

Salience

 

A trend to focus on easily recognisable features; for example, people worry about dying from a shark attack, rather than a more likely event such as dying in a car accident.

 

Overconfidence Basis

 

Some people are too confident in their ability, which causes them to take greater risk. This is more prone in “experts” than laypeople as they are more likely to be able to convince themselves that they are right and understand the risks fully.

 

Survivorship Basis

 

An overconfidence that comes from a focus on the survivors of events. We hear more about those who survived living on a desert island or became rich starting their own business, but not so much about all those who fail.

 

Shane suffers from most of these and many more. He can be found at This email address is being protected from spambots. You need JavaScript enabled to view it.

Shane Dillon

Shane has written the Word business column since 2009. He left his home town of Brisbane, Australia in 2004 and has worked in several Asian countries as well as Guatemala and Ukraine. He is interested in economics and the subtleties of doing business in Asia. Shane works in the insurance industry and can be contacted at shanedillon@pacificcross.com

linkedin.com/in/shanedilloninsurance

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