First, though, let’s answer the question of “What is a Cognitive Bias?” A cognitive bias, as per the all-knowing Wikipedia, is “a pattern of deviation in judgment, whereby inferences of other people and situations may be drawn in an illogical fashion. Individuals create their own “subjective social reality” from their perception of the input. An individual’s construction of social reality, not the objective input, may dictate their behavior in the social world. Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate judgment, illogical interpretation, or what is broadly called irrationality.” So, basically cognitive biases cause us to distort reality and turn it into the reality we live in. When we make decisions based on this false reality, our actions are irrational. Irrational actions can be harmful to those around us and often limit us to being something less than what we could be because of false limitations. Let’s get rid of some of these limitations!
The first bias I want to talk about is the one we call “The planning fallacy”. This one refers to the tendency to overrate our own abilities and capacities. This often results in less than awesome planning and preparation. This tends to stem from the assumption we are smarter and more capable than those around us. This can cause us to give too much credit to our plans and not enough credit to the messes this crazy spinning ball we live on can create in an instant. So what’s the fix? Well, a good start is to seek out advisors and mentors. These are people we naturally assume know more than we do. This could be a personal trainer, a financial coach or advisor, or just a highly respected individual. Seek out the guidance of these people and use them to bounce ideas off of. Tell them you expect them to point out your weaknesses so you overcome them. Don’t be a wussy and take what they tell you and use it to get better!
The second bias is closely related to the planning fallacy. It’s called “Confirmation bias.” Confirmation bias is the tendency to focus on those things that support our beliefs while we ignore or give less credence to those things that challenge our views. We have to knock that garbage off!!! Sometimes we have to even tell our advisors to knock it off.
We put a stop to this nasty bias by focusing on having an open mind and truthfully considering all options. The hardest part of overcoming confirmation bias is recognizing it. We all do it, but that doesn’t make it right. It’s best to allow others to help us overcome our difficulties. Through this we learn new ways to approach things and get the opportunity to “update our bias” to something a bit more rational.
“Status quo bias” is a bias that drives me bonkers more than any of the others. For whatever reason, I’m programed to continually look for a better way. This requires frequent change. Most of us don’t like change. Most of us won’t admit it, but it’s a fact. We’ll stick to the old way of doing things just to avoid change. When talking investments, Samuelson and Zeckhauser(you look it up!), in a 1988 study, found that people tend to lose money because they’d prefer sticking to the way they’ve always done things, rather than move forward to newer options that may be better. Do your life, and all your relationships, a solid and kick out the status quo bias. Do this by changing a little each day. Set yourself up to do something that makes you uncomfortable every day. Yep, every day! Maybe it’s sprinting backwards on the treadmill (youtube that!) or telling someone how awesome they are. Pretty soon you’ll find that you’re willing to really consider what makes the most sense, rather than what is easiest or most like what you’re accustomed to.
Finally, lets look at “current moment bias.” This is the plague of now. We see it in our society and it’s coming out in our children. Our tendency to prefer immediate gratification in place of long-term gains, even when the long term gains are of greater value.
Generation X and Y are putting off saving for tomorrow to buy the latest and greatest. We want the shiny and new. We can see the evidence of this in the debt levels in our country, not to mention the growing debt of our country.
To overcome the moment you need to keep your eye on the prize (I like Bruce Springstein’s version). NO really, start thinking about the long term. Obviously there’s a need to enjoy the present, but we must maintain a proper perspective. A couple things we’ve found work well at our house include writing down your big goals and posting them somewhere where you see them regularly. Chopping those goals down to size is important too. Not that you shouldn’t have big goals, but if you can break those goals into smaller pieces, it helps you make better decisions in the moment. Finally, reward yourself along the way. Discipline is important, but we don’t want your bias of overestimating your self-discipline to get in the way of your success. Admit it, you have weak moments. Plan for them and allow them in your journey. Use those little moments like steel-towed boots to kick the snot right out of your biases!
Well, there you go. Get to work! You’ll thank me later.
About this Author: Ed Kinsey has been in the financial services industry since 2003. He has experience in Real Estate, Mortgages, Commercial Finance, Annuities, and Life and Health Insurance. His goal is to benefit the lives of one million people. He want companies to start providing better benefits at lower costs through our services. He wants to enlighten people to the retirement benefits available through life insurance, the only tax free retirement option. We have secure solutions. Ed is also a world ranked powerlifter and fitness enthusiast.