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Cognitive biases

Cognitive biases are unconscious errors we make that arise from errors in our thought process.

They show up when we perceive things through the filter of our own experiences and preferences. A good example of a cognitive bias is paying attention to only news stories that confirm your belief. By curating what we see, we reinforce our beliefs and ignore evidence to the contrary.

There are all sorts of biases to the point that the list is almost endless.

But before we jump in and discuss specific biases, you may be asking the question: how can we stop ourselves from having a cognitive bias? The answer to this is actually pretty simple. We can interrupt or stop our cognitive biases by:

1. Acknowledging that they exist

2. Seeking out viewpoints from all sides

3. Actively combating them through mental models

I'm going to list 13 different biases below, so we're just going to address the acknowledge step today (#1 above).

Sunk cost bias

This is where you justify an increased investment, based on the prior investment you’ve made, despite new evidence suggesting that the decision was probably wrong.

Endowment effect

This is valuing what you own greater than what you don’t.

When we own something, we also experience loss aversion... even when we're wanting to sell it.

Status quo bias

In some way, we all desire to keep things the same.

Confirmation bias

We have a tendency to accept information more readily when it confirms our beliefs.

This is

• Only following those on social media who agree with you

• Choosing news sources that present stories as you like them

We can counteract this by asking the question: what would cause me to change my mind?

Hindsight bias

We tend to see events as more predictable than they are.

We misremember our previous beliefs and suppress our previous doubts, which leads to taking risks that we shouldn’t.

Anchoring bias

This is being overly influenced by the first piece of information we hear.

In negotiations, this is especially dangerous.

You can use this in your favor as well. Go on offense and create the anchor when negotiating with others.

Misinformation effect

Have you ever recalled an event different than someone else? It’s likely one or both of you are adding details that happened after the fact.

Our memories are changed by hearing the opinions of others and being asked questions.

Actor-observer bias

Have you ever made a mistake and blamed an outside force? But then blamed the person when they made the same mistake?

You failed the test because of your roommate. But they failed because they didn’t study.

False consensus effect

We overestimate how much people agree with us. This is reinforced by:

• Spending time with those with similar beliefs

• Not seeking out other opinions

• People not speaking up when disagreeing

Halo effect

Have you ever met someone and not liked them? This could be the halo effect. It is letting an initial impression of a person influence the way you think of them.

We want to be correct. So we unintentionally look for ways to reinforce our initial impressions.

Self-serving bias

You passed because you’re brilliant, but you failed because of some outside force.

It protects our self-esteem (which is great), but watch out for instances where you blame others for personal failures.

Availability heuristic

We see a plane crash, so we start assuming they’re more common than they are. We see them on the news and they create an impression on our minds.

Optimism bias

This is our tendency to overestimate the probability of good things and underestimate the probability of bad things.

This is important to acknowledge in investments. We very often don’t identify all the risks.

In summary

Hopefully, by calling these biases out, you're more aware of what you're actually biased in. I'd love to hear which you feel you're most susceptible to.

Tweets that hit home

When I'm feeling energetic, I want to highlight some tweets I enjoyed recently.

Procrastination is an epidemic, and this thread does a great job of helping you kill it in your life:

This Stephen below is a friend and on Saturday is posting an in-depth interview I did with him. I've also recorded a podcast where he talks about crypto, so be looking for that soon:

Until next time...