...The 12 cognitive biases that prevent you from being rational George Dvorsky The human brain is capable of 1016 processes per second, which makes it far more powerful than any computer currently in existence. But that doesn't mean our brains don't have major limitations. The lowly calculator can do math thousands of times better than we can, and our memories are often less than useless — plus, we're subject to cognitive biases, those annoying glitches in our thinking that cause us to make questionable decisions and reach erroneous conclusions. Here are a dozen of the most common and pernicious cognitive biases that you need to know about. Before we start, it's important to distinguish between cognitive biases and logical fallacies. A logical fallacy is an error in logical argumentation (e.g. ad hominem attacks, slippery slopes, circular arguments, appeal to force, etc.). A cognitive bias, on the other hand, is a genuine deficiency or limitation in our thinking — a flaw in judgment that arises from errors of memory, social attribution, and miscalculations (such as statistical errors or a false sense of probability). Some social psychologists believe our cognitive biases help us process information more efficiently, especially in dangerous situations. Still, they lead us to make grave mistakes. We may be prone to such errors in judgment, but at least we can be aware of them. Here are some important ones to keep in mind. Confirmation Bias We love to agree with people who...
Words: 1880 - Pages: 8
...What is a decision? It can be defined as, "the act of reaching a conclusion or making up one's mind. Generally, a decision is a choice that an individual makes. Decision-making is leading characteristics of leader. Managers are paid so that they reach possible solutions by making decision, and it is an integral part of their daily duties. The consequences of decisions can be ranged from minor results to career threatening. In spite of the results, it is significant to understand when a decision has to be made and the best way to do it. A rational decision making model provides a structured, sequenced and wise way to decision making and it is based on the logic of optimal choice that would maximize the profit. Using such approach helps to ensure discipline and consistency that is built into decision making process. As the word rational tells us, this approach brings logic and order to decision making. However, in Administrative decision making model people with different levels of motivation have no time to make decisions, therefore they usually try to find short and easy ways to problems. Under the administrative model, decision maker never tries to optimize but instead satisfices and treats objectives as loose constraints. While rational model requires optimization, choosing the alternative with highest value, satisficing, administrative model, requires finding the first option with an acceptable value. For example, let`s assume that I had a house I wanted to sell. If I listed...
Words: 1533 - Pages: 7
...Bias comes in many forms, including race, age, gender, and ethnicity and can be universal or location specific (Fiske, 2010). Biased individuals believe the biases they are applying to others are right without regard for the truth (Fiske). Prejudice, stereotyping, and discrimination are all somewhat similar; however, they are also very different. Each form of bias is performed by one individual or group of individuals judging another individual or group of individuals prior to obtaining factual knowledge of the individual or group (Fiske). However, each form of bias is performed with a different focus. An individual behaves in a prejudicial manner when he or she has an emotional reaction to another individual or group of individuals based on preconceived ideas about the individual or group (Fiske, 2010). For example, a White individual refusing to drink from the same water fountain as a Black individual based solely on racial bias represents prejudice by the White individual. The White individual has no factual information to support not drinking from the same water fountain; however, he or she has a preconceived idea of the Black individual and therefore refuses to use the same drinking fountain. According to Fiske (2010), stereotyping is the application of an individual’s own thoughts, beliefs, and expectations onto other individuals without first obtaining factual knowledge about the individual(s). Many times, stereotypes are created after multiple occurrences of a similar...
Words: 1243 - Pages: 5
...da Data interpretation is a component of modern life for most people. Interpretation is the mechanism for translating all the numerical data that we are bombarded with every minute of every day. Consumers interpret data when they turn on the television, scan headlines on an iPhone or tablet, view advertisements alleging that one product is superior to another or they make purchases based on advertising as to the price and/or efficacy of a product. A prevailing method of analyzing numerical data is known as statistical analysis and the activity associated with assessing and explaining data in order to make predictions is referred to as inferential statistics. Knowledgeable consumers understand the value of discerning the veracity of data interpretations, forecasts and recommendations by recognizing sources of bias such as sampling procedures, or misleading questions, margins of error, confidence intervals, and incomplete interpretations. The ramifications of flawed or erroneously interpreted data can be far- reaching. For example, every 10 years a major census is completed in the United States. The findings are employed to calculate the number of congressional seats that are assigned to each district; where new highways will be built; where new libraries and schools are required, where new day care centers, hospitals and nursing homes will be situated; where new parks and recreational centers will be located, and the...
Words: 1515 - Pages: 7
...Social Biases University of Phoenix Dr. Kinsey August 20, 2012 Social Biases In today’s society social biases can be a problem because many people may look down on another person or group. People and groups can look down on another person believing he or she is better than the other. This type of social influence that some groups may have can generate common biases. Social biases can hinder interaction between people and become very damaging to people (Fiske, 2010). “Just as aggression research reveals the basic social psychology of processes that can prove deadly, the research on bias reveals processes that are demonstrably unhealthy and sometimes deadly for both agents and targets of bias” (Fiske, 2010, p. 428). Characterizing a specific way of thinking or the way a person is being view is sometimes called bias. People’s behavior and attitude which may be influenced by judgment can be displayed as bias. Many people do not realize they are bias, because it is not common to know you the person is bias. Others may identify a person being bias but one may not realize they are bias. In this paper I will define the concept of prejudice, stereotyping, and discrimination. Explain the differences between subtle and blatant bias, and identify some common bias and ways to prevent bias in today’s society. Concept of Social Bias Social Bias is “prejudice attitudes toward particular groups, races, sexes, or religions, including the conscious or unconscious...
Words: 1305 - Pages: 6
...Social Psychology Mandana Smith PSY/555 June 18, 2012 Deirdre A. Teaford, Ph.D. Social Psychology Insight by social psychology in regard to individual learning, interaction, and development of personalities. Developed over time on various relationships, a better understanding into reactions or actions based on other individuals and the environment provide some insight. The purpose of this paper is to define social psychology, analyze the four key characteristics of social psychology as well as explain the concept of situationism and role in social psychology, and identifying the five core social motives and explain the effects on social psychology. Defining Social Psychology Effects of cognitive and social process on an individual’s perceptions on influences in relation to others as a scientific study are defined as social psychology. Individuals influence each other whether by taking, behavior, actions, or walking that also influence affects on -the -job or career paths he or she takes. A product of his or her environment, other items, places or individuals can carry a positive or negative effect on individual personalities and development over time. Social psychology provides a better understanding into various aspects of human behaviors and interactions with...
Words: 1300 - Pages: 6
...Biases and Judgment Karmen Burrell AIU Online MGT600-1204A-01 Unit 2 Individual Project September 2, 2012 Part One (Theoretical Framework) What are the effects of human resources outsourcing on leadership performance and employee commitment? This is a question facing every business. Although this is not a new topic of discussion there are still questions about its true effect on leadership performance and employee commitment. Outsourcing different jobs throughout a business’s many departments has been a common practice since the 1970’s. (Pence, 2010). At first the most common job/task that was outsourced was the company’s payroll but over the last decade more and more businesses are finding it more economical to outsource the majority of the jobs/tasks performed in a human resource department. (Nash, n.d.). In the following report we will discuss the variables and identify if they are dependent, independent, mediating, or moderating. The first variables needing to be discussed are the dependent or criterion variables. In this study they would be leadership performance and employee commitment. Leadership performance is always going to be present whether it is good or bad. The same can be said about employee commitment. These two variables may be influenced by other factors as to which end of the scale they will be located, but they will always be present. The second variable that needs to be discussed is the independent or predictor variable. (Bazerman...
Words: 2047 - Pages: 9
...on the investment staff of a family office. Pompian is a Chartered Financial Analyst (CFA), a Certified Financial Planner (CFP), and a Certified Trust Financial Advisor (CTFA). He is also a member of the CFA Institute (formerly AIMR) and the New York Society of Security Analysts (NYSSA). He holds a BS in management from the University of New Hampshire and an MBA in finance from Tulane University. Pompian is a regular speaker on the subject of behavioral finance and has published several articles on the subject. He is married with three sons and can be reached at michael.pompian@mercer.com. “ Michael M. Pompian describes various biases which we can see in human beings , also tells about various experiments on human beings in his book “ BEHAVIOURAL FINANCE AND WEALTH MANAGEMENT “ and tells “HOW TO BUILD OPTIMAL PORTFOLIOS THAT ACCOUNTS FOR INVESTOR BIASES “ The book is published by John wiley and sons, inc. ,Hoboken , New jersey. Published simultaneously in Canada. The book was published in the year 2006 . SUMMARY : Understanding the use of behavioral finance theory in investing is a important topic these days. Nobel laureate Daniel Kahneman has described financial advising as a prescriptive activity whose main objective should be to guide investors to...
Words: 4842 - Pages: 20
...CORPORATE FINANCE HONOURS 2011-2012 Topic: Behavioural corporate finance Lecturer: Yue (Lucy) Liu E-mail: Yue.Liu@ed.ac.uk Outline Psychological phenomena Biases Heuristics Framing effects Impact on corporate finance Valuation Capital Budgeting Capital structure Dividend policy Mergers and acquisitions Yue (Lucy) Liu 2011/2012 Corporate Finance 2 Psychological phenomena Bias Excessive optimism Overconfidence Confirmation bias Illusion of control Heuristics Representativeness Availability Anchoring and adjustment Affect Heuristic Framing effects Loss aversion Aversion to a sure loss Yue (Lucy) Liu 2011/2012 Corporate Finance 3 Biases Bias A predisposition toward error. – Excessive optimism People overestimate how frequently they will experience favorable outcomes and underestimate how frequently they will experience unfavorable outcomes. – Overconfidence People make mistakes more frequently than they believe and view themselves as better than average. – Confirmation bias People attach too much importance to information that supports their views relative to information that runs counter to their views. – Illusion of control People overestimate the extent to which they can control events. Yue (Lucy) Liu 2011/2012 Corporate Finance 4 Heuristics Heuristic A rule of thumb used to make a decision. – Representativeness People make judgments based on stereotypic thinking, asking how representative...
Words: 875 - Pages: 4
...Social Biases Paper Psych 555 May 5, 2013 Dr. Anthony Social Biases Paper Bias is generally described as favoring thinking of particular way, or something to watch. Being biased means attitude of that person or behavior is particularly prejudice. The person may be aware of that he is bias. Social prejudices are a social problem, because a group is looking at another individual or group as the group feels that they are superior to others. The social interaction among some groups might have to create common biases. Social biases may be very harmful and can interfere with human interaction (Fiske, 2010). Define the concepts of prejudice, stereotyping and discrimination Prejudice means feeling or having attitude towards members of a group, established solely on the basis of membership in this group. Stereotypes dealt with generalizations regarding others that usually cause display of others group predictable and typical characteristics. Discrimination means an act of a group or person against another group or person who is the prejudice subject. Stereotypes put people into groups having similar attributes or characteristics. Stereotypes have the ability to distort the perspective of a person. As soon as a stereotype becomes active, the features belong to the group, either positive or negative, they are easy to remember. Stereotypes can influence social judgments on how much a person loves another, and this behavior is normal. There was a time when because of the stereotyping...
Words: 1089 - Pages: 5
...Perception and Individual decision-making (Robertson) Perception Perception is a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. However, what we perceive can be substantially different from objective reality. People’s behaviour is based on their perception of what reality is, not reality itself. Factors that influence it Attribution theory The attribution theory is an attempt to determine whether an individual’s behaviour is internally or externally caused. Internally caused behaviours are those we believe to be under the personal control of the individual whereas externally caused behaviour is what we imagine the situation forced the individual to do. * Determinants of attribution 1. Distinctiveness: what we want to know is whether behaviour is unusual, if so we are likely to give it an external attribution. If not we will probably judge the behaviour to be internal. 2. Consensus: behaviour shows consensus when everyone who faces a similar situation responds in the same way. If consensus is high you will probably give an external attribution to the individual’s behaviour whereas if the consensus is low it will be attributed to an internal cause. 3. Consistency: does the person respond the say way over time? The more consistent the behaviour is the more we are inclined to attribute it to internal factors. ...
Words: 1619 - Pages: 7
...Sunk Costs and Biases I believe that all personal bias comes with a common set of language and behaviors that cross racial, ethnic and gender based structures. Bias is created by a real life experience and contains both a mindset and associated behavioral characteristics. Personal bias is infused in every organization through the connection of the people that provide the services. Biases result when an individual inappropriately applies a heuristic, (Bazerman and Moore, 2012). Researchers have found that people, rely on a number of simplifying strategies, or rules of thumb, when making decisions. These simplifying strategies are called heuristics. The four main heuristics are availability, confirmation, representativeness and affect. With heuristics choice making comes personal bias which is mixed with organizational bias to create another level of systemic biased behavioral impacts. In DPS we are making decisions that impact children from a biased perspective that is not always about students first. The biases range from who is invited to present to how we structure our organizational communication and problem solving processes. Embedded within organizational culture is a bias called sunk cost. Sunk cost bias is about persisting with bad decisions due to our irrational attachment to costs that we cannot recover has become so common that you can find them just about anywhere, (LiteMind). That’s the sunk cost...
Words: 827 - Pages: 4
...“Introspection Illusion” Introspection Illusion is defined as a cognitive bias in which people wrongly think they have direct insight into the origins of their mental states, while treating others' introspections as unreliable (Wikipedia). Introspection tends to be the evidence one receives about their self as they look to their own thoughts and feelings, and adding an illusion to this mix adds a misty fog that people look through as they look inward. In this paper I will attempt to show how Introspection Illusion affects us not only in our day to day lives, but how it can also have a major impact on our financial decisions. Introspection Illusion was first defined by Emily Pronin. She observed how people viewed their selves and how aware they were of their motives, thoughts and feelings. This awareness, however, is often weak and unreliable. Eric Schwitzgebel argues this case by stating that “introspection is unreliable in the sense that we are prone to ignorance and error in making introspective judgments about our own conscious experience,” (Smithies). In this sense, our inner motives, thoughts and feelings are strictly biased based on our limited understanding of the world surrounding and with little thought to the personal introspections of others around us. So why then do we rely so much on our introspection? Pronin claims that it is because they are intimate and comfortable, which makes it easy and safe to believe in the classic statement of “I think therefore I am...
Words: 649 - Pages: 3
...Running Head: LITERATURE REVIEW: HALO EFFECT 1 Literature Review: HALO EFFECT NO NAME GIVEN HERE Liberty University BUSI 600-B04 21 January 2013 LITERATURE REVIEW: HALO EFFECT Abstract 2 The term “Halo Effect” has several definitions. In conducting business research, it is important to understand which definition is to be used and apply that definition to the problem at hand. In this paper, we will attempt to define the correct version of the halo effect as it applies to this literature review. This paper will then look at the history of the halo effect in business and define how it is being used today. During the writing, examples and studies regarding the halo effect that have already been completed will also be reviewed to see if the halo effect can genuinely and repeatedly be used in business to increase profits or generate revenues. LITERATURE REVIEW: HALO EFFECT Literature Review: Halo Effect Introduction Definition When discussing and researching the term “Halo Effect” the various definitions of the 3 phrase must be reviewed. Once reviewed, the researcher then has the responsibility to determine which definition best fits their research question at hand in order to best formulate the research design and subsequent answer. One of the definitions of halo effect is from the textbook Business research methods by Donald Cooper. It is defined as “error caused when prior observations influence perceptions of current observations” (Cooper & Schindler...
Words: 7558 - Pages: 31
...actually gets chosen/ judged The reasons why descriptive decisions are different from normative decisions: Bounded rationality: time cost constraints; incomplete information; perceptiual errors in obtaining information; cognitive load in information retention and performing caluculations Bounded decision making: We seek solutions that are the best given the information that is available; that are satisfactory (good enough) We satisfice rather than optimize Assumptions of bounded rationality: Limited search for criteria: rely on familiar criteria already in effect Limited review of alternatives: fous on easily found alternatives Satisficing: select the first alternative that is good enough Decision making—Biases and Fallacies in daily life: Biases: systematic distortions or patterns of error in judgment Fallacies: use of...
Words: 2954 - Pages: 12
