Psychologists claim that many of our biases are evolved mental processes which at one point may have been adaptive to our environment. Because the mind is not a perfectly calculating machine, it uses many different heuristics (or “rules of thumb”) that help guide the decision-making process. Although this process isn’t perfect, it often gets the job done in terms of survival and reproduction. Many of these biases may still be functional in today’s world, but others can greatly inhibit us from making rational and intelligent decisions.
Starting with the Bias Blindspot which is our tendency to think we are less biased than others the article lists the different types of biases investors (and everyone) face and more importantly how to overcome them:
- · Confirmation Bias
- We tend to favor information that supports our preconceptions
- · The Framing Effect
- Presenting the same information from a different perspective can dramatically alter the decisions we make.
- · Gambler’s Fallacy
- If I toss a coin 5 times and each time it lands on tails, do you think there is a greater likelihood that future trials will land on heads?
- · Halo Effect
- Why is Dr. Dre telling me to drink Dr. Pepper?
- · Mere Exposure Effect
- Is our tendency to like things merely because we are familiar with them.
- · Planning Effect
- Is our tendency to underestimate how much time we need to complete a task.
- · And the list goes on…
Oh, and the solution to the Bias Blindspot? Try to be more modest in estimating your own intelligence and admit that you are subject to biases like everyone else. See the whole post at: Biases That Cripple Smart Decision-Making