How to make better decisions [Cognitive Biases]

Making wrong decisions sucks. It gets even worse when you go down the wrong path when you need to make big life decisions.

And depending on the size of the decision, it can be quite expensive. (“Dafuq! I shouldn’t have finance that shiny $80.000 car in hindsight.”)

Of course, we don’t make any decision knowing that it is wrong. We believe that we make the right decision. But from time to time, our beautiful brains are having fun, tricking us with some cognitive biases. That little tricks can cause massive damages when we are not aware.

If you know the tricks of your brain, you can be aware and make the right decisions.

Let’s have a look at the most common cognitive biases that screw up our decisions and see how we can react when they strike.

Anchoring Bias

We overrate the information we get first.

When you’re browsing the internet looking to buy something, you eventually will stumble upon strike prices.

Usually, these shoes would cost $300, but today, you are lucky only to cost $190. What a deal, right?

Wrong.

Most of the time, the shoe dealer is not a philanthropist but a businessman looking to make money. Therefore, he decided to set a trap for you: Creating a price tag that is way higher than the actual cost. As an unaware buyer, you compare the price to the strike price and decides that this is a good deal.

How to defeat anchoring bias:

Knowing that the shoe dealer can’t afford to give away products cheap, you ignore the strike prices from now on.

Instead of comparing the price to the sneaky strike price, you compare the price against other similar products to decide.

Conservatism Bias

We persist in our previous opinion even if there is new information.

Let’s say you bought stocks of ACME company which produces food supplements. The stock did well over the last five years, but today the government prohibited food supplements. The company has lost the right to sell its only product and will likely go bankrupt. You have new information that changes the situation of your stock. If you hold on to it because you think the next five years will be like the last ones, you’ve been trapped by conservatism bias.

How to defeat conservation bias:
If you get new information on a given topic, step back a minute and reevaluate the changed circumstances to make sure that you incorporate the new truth.

Ostrich Effect

We try to avoid unpleasant information or situations.

The Ostrich effect is a famous cognitive bias – you probably know the saying, “He buries his head in the sand!”. This is the visual description of the Ostrich effect.

However, burying its head in the sand isn’t intelligent in theory and real-life either. When you ignore negative information, you will shield yourself from it in the short term, but you can’t solve problems by ignoring them.

How to defeat ostrich bias:
No matter how negative information is, ignoring it won’t bring you any further. Instead, use the circle of concern to check if you can do something about the problem or if it is outside your influence. If it’s inside your circle of influence, swallow the bitter pill and start solving it.

Availability Heuristic

We overestimate the information that comes to our mind first.

Do you think eating ten cheeseburgers every day isn’t unhealthy because you know someone who did exactly this and lived 100 years? If so, you got trapped from the availability heuristic.

“If you can think of it, it must be important.” – Tversky and Kahneman

The fact that one person managed to live that long does not prove that it’s healthy in general.

You wouldn’t state that it’s risk-free to jump out of an airplane without a parachute because one person survived it.

If you see the airplane crash in the news repeatedly, you tend to think that planes are one of the riskiest ways of travel. The opposite is the case.

How to defeat availability heuristic:
Be aware of which information you trust to justify your decisions. In case of doubt, make a step back and try to find studies about this topic to get a scientific view.

Bandwagon Effect

We are likely to adopt the opinions and behavior of a group.

As humans, we want to belong to others. Therefore, we tend to adjust our thoughts & actions to the prevailing ones of a group.

How to defeat availability heuristic:
Especially in meetings, be bold and communicate your honest opinion. Every discussion gets more valuable when we look at the topic from different angles.

Choice-Supportive Bias

We tend to believe that our taken decisions are better than they were.

Let’s say you need a new phone. Apple or Android. You’re undecided because it doesn’t matter for you. After all, it’s just a phone. Long story short, you finally go out to buy an iPhone.

In the evening, you meet with some friends and get asked: “Cool, you have the new iPhone!”. “Yeah, of course! It’s simply the best phone you can get. I recommend it!”

Once we made a decision, we tend to downplay the cons and highlight the pros.

How to defeat choice-supportive bias:
This bias will not directly influence your decision-making because it occurs after you made a decision. But if you’re not sure if your decision was good, don’t let the sellers’ confirmations like “Congrats – you made the right decision!” hold you back from revoking the decision.

Clustering Illusion

We believe that we found a pattern in a set of data where no such pattern exists.

Have you ever been to a casino to play roulette? You know that the probability of getting a black or a red number is the same. However, if you see the ball constantly rolling 2x to a red number and then 5x to a black number, it must be a pattern, right? Nope.

How to defeat clustering illusion bias:
Recognize that there isn’t always a specific pattern – random events are real. Even if you know that some events will even out over the long run (probabilities at roulette), this doesn’t mean that you can rely on this pattern for the short time frame of your game.

Confirmation Bias

We overvalue information that confirms our previously existing beliefs.

Confirmation bias is one of the most common biases we face every day. Since everybody has beliefs, we continually evaluate new information based on our existing beliefs

You probably have heard about those people that loudly deny global warming because, hey, it got colder in winter.

They used the fact that it got colder as evidence that their belief – global warming is a lie – is true. Nonsense, of course.

How to defeat confirmation bias:
To defeat the confirmation bias, be sure to stay open-minded, even if you already have a strong opinion. Make a step back and encourage opposing opportunities to make the best rational decision possible.

Outcome Bias

We judge decisions by the outcome instead of how the decision was made in the situation.

Imagine it’s a foggy day, and you’re standing one step away from a hole inside the jungle. Not knowing what’s on the ground, you jump. Five meters later, you splash into the water.

Was it an exciting experience? Absolutely. Was it also a sound decision? Not really. But since it turned out okay (aka you didn’t die), you will be more likely to jump again next time.

How to defeat outcome bias:
Gut feeling is a good thing. However, don’t mix up gut feeling with the lucky outcome of a stupid action in the past. Be sure to base your decisions on facts and logic.

Recency Bias

We tend to overvalue recent information.

Several stocks these days rose around +50% over the last 12 months. Since 1929, the stock market on average made approximately 10% a year. If you base your decisions on short-sighted data, you quickly get trapped in the recency bias.

How to defeat recency bias:
Get enough data to base your decisions on. Especially in the stock market, don’t blindly follow the general mood of the market but have a look at the big picture.

Salience Bias

We tend to focus on characteristics that stand out instead of recognizing all aspects.

You want to buy a new smartphone. You can buy the iPhone for $900 in cash. However, the retailer has a specific offer where the iPhone only costs $1. You only have to sign a contract where you will pay $50 for the next 24 months – easy.

Deep down, you feel that it is the wrong decision, but the price tag of only $1 for an iPhone is too alluring for you.

You’ll end up $300 more because you got trapped by the salience bias.

How to defeat salience bias:
As with the confirmation bias, try to incorporate all information equally and use your logical brain. Don’t compare apples and pears.

Survivorship Bias

We tend to focus on the measurable date and leave out data that didn’t make it past the selection process.

In World War II, a lot of aircraft got shot. To stop that, they came up with a brilliant idea: They analyzed all returning aircraft and marked the bullet holes so that they can strengthen the shield at those positions.

That was a logical error. Their goal was to find the most vulnerable areas on aircraft to strengthen the shield. Instead of the returning aircraft, they should have studied the ones that got shot and didn’t come back. (To be fair – that could have been a challenge).

How to defeat survivorship bias:
Ask yourself if you have the needed data available to make an accurate decision.

Conclusion

Making wrong decisions sucks! This article won’t save you from making one or another bad decision in your life. But I sincerely hope that you will bypass the sneaky traps of decision-making at your big life decisions now that you know about the common biases.

My question for you: What is your biggest challenge when you have to make decisions? Please write me at hello@petersutter.com.