When I started working in the financial markets, I was enamored with how the mind works. More specifically, it was fascinating that almost everything I was taught in college about the markets was wrong. We rarely act as rational human beings. I saw this by studying history, watching my own actions, and the actions of others. I began to study psychology and behavioral economics.
One of the subjects I spent a lot of time studying was cognitive biases and how they affect our thinking. These biases are not always bad but it is key to understand them to improve your own decision-making and to see other point of views.
Through my studies, I found that the 3 biases affecting people most are confirmation bias, recency bias, and the bandwagon effect:
1. Confirmation Bias
Confirmation bias is the tendency to find information that only confirms to our existing beliefs. This was very useful when we were roaming around as hunter-gatherers and worried about a wild animal eating us. In that time, it was best to err on the side of caution and assume that whatever was in the bushes might kill us.
However, in modern society, this can cause us to make plenty of wrong decisions. Confirmation bias is is the antithesis of the scientific method. I suggest trying to falsify our existing beliefs by engaging with people on the opposing side. With so much available information on the internet, it is a shame people tend to sit in their filter bubbles. Whether that is political, religious, fitness, or nutrition, we need to be open to others opinions and be willing to respect their viewpoints.
I find that having my preconceived ideas challenged and being willing to change my mind leads to better decision making in the future. It took me a long time to get to this place. I used to want to always be right all the time and I held my confirmation bias close. Now, I try to recognize when it starts creeping in and open up to opposing information.
“The older I get, the more open-minded I get, the less judgmental I get.” – Gwyneth Paltrow
2. Recency Bias
Recency bias puts too much emphasis on the most recent and available information. We tend to assume that whatever is happening in life, whether good or bad, will continue for the foreseeable future. People with recency bias can become overly pessimistic or optimistic about life events. This causes us to over-extend ourselves in the good times and seclude ourselves in the bad.
Nothing in life goes in a straight path, life is full of cycles and we must learn to ride these waves. No matter how good or bad something feels in the moment, remind yourself that it won’t last forever. A meditation and mindfulness practice helps me notice when recency bias is creeping into my life and allows me to center myself, stop putting myself down when things are going poorly and not to be too overconfident in the good times.
3. Bandwagon Effect
Doing something because everyone else is doing it regardless of our own beliefs is the bandwagon effect. Everyone believes we are our own person and would never act a certain way just because other people are doing it. For example, watch how the mob mentality unfolds when people act in ways they never imagined they would. Our brains evolved as part of tribes and in order to keep us safe, we had to stick together.
If we didn’t agree with the tribe, we could be banished and would then die alone in the wild. Our brains have yet to evolve from this stance, and it makes it easy for us to just jump on the opinions of the group and ride along. Whenever I find myself agreeing with everyone else, I try to make sure I am doing it for the right reasons and it is not for the purpose of staying in the group. The status quo needs to be challenged.
When challenging these biases, I have found the most benefit is in debating with others. Cognitive biases make it hard to change someone else’s mind, even my own. I try to stay open to others’ points of view and try to see where they are coming from and why they came to their conclusion. In the end, different opinions are what make the world go round. How much fun would it be if we all believed the same things? If you would like to check out a more comprehensive list of biases, The Visual Capitalist has a great infographic.
“Be sure you put your feet in the right place, then stand firm.” – Abraham Lincoln
In understanding how our own brain works, it allows us to be more empathetic with others and will help find our own blind spots. While it does happen less these days or at least I hope, I find it fascinating how I will still make irrational decisions even though I am aware of the biases I struggle with (there is plenty of research that shows I am not the only one). If you find yourself in the same situation, remind yourself that you are now aware of your biases and improving your decision-making with this knowledge.
Which one of these biases impacts your life the most? Let us know so we can help!