Cognitive BiasesWhat you should know & What

can you do about it?

3/26/2014 1Footer Text

Thinking, Fast and Slow - Daniel Kahneman

• Psychology and economics come togethero Most scientific economic models of human decisions assume people to

behave rationally. Most psychological theory does not.

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What is the feeling this person presenting

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Do the math?

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Which Line is longer, second longest, shortest?

System 1 and System 2

• System 1, is our fast, automatic, impulsive, intuitive and largely unconscious mode.

• It is System 1 that detects hostility in a voice and effortlessly completes the phrase “bread and. . . . ”

• System 2, in Kahneman’s scheme, is our slow, deliberate, capable of reasoning, cautious, analytical and consciously effortful mode of reasoning about the world.

• It is System 2 that swings into action when we have to fill out a tax form or park a car in a narrow space.

• System 2 is lazy and any work it has to do it will try not to.

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Do the math?

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A bat and a ball cost a total of

$1.10. The bat costs $1 more

than the ball. How much does

the ball cost?

Count number of passes white team makes

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Priming Effect

• Ideomotor effect - influencing of an action by the idea

• Florida Example

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Priming effect

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• Honesty Box – drop money in for milk used

• Suggested prices are posted

• Banners appear

• Purely symbolic reminder of being watched prodded people into improved behavior. As we expect at this point, the effect occurs without any awareness.

Cognitive Strain

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• You make less mistakes when you’re forced to read small print or make your mind work.

• Cognitive strain, whatever its source, mobilizes System 2, which is more likely to reject the intuitive answer suggested by System 1.

• Ego Depletion – Effort of will or self-control is tiring; if you have had to force yourself to do something, you are less willing or less able to exert self-control when the next challenge comes around.

Anchoring

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Was Gandhi more or less than 144 years old when he died?

How old was Gandhi when he died?

Anchoring

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• Anchoring Effect - occurs when people consider a particular value for an unknown quantity before estimating that quantity.

• We have a tendency to be influenced by irrelevant numbers

• Buying something that’s negotiable? Be careful!

Sunk Cost Fallacy

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• Sunk Cost - The decision to invest additional resources in a losing account, when better investments are available

Patterns

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BBBGGG

GGGGGG

BGBBGB

• Are the sequences equally likely?

Availability of Info / Bad Events / Rare Events

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• A salient event that attracts your attention will be easily retrieved from memory and more relevant to your decision making.

• Availability heuristic - mental shortcut that occurs when people make judgments about the probability of events by how easy it is to think of examples

• If you can think of it, it must be important

• How is information shown?

Planning Fallacy / Optimistic Bias / Predicting the Future

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• The planning fallacy is the tendency to overestimate benefits and underestimate costs, impelling people to take on risky projects. o In 2002, American kitchen remodeling was expected on average

to cost $18,658, but actually cost $38,769

• You can explain the past therefore you can predict the future

Prospect Theory / Loss Aversion

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• You are offered a gamble on the toss of a coin. If the coin shows tails, you lose $100. If the coin shows heads, you win $150. Do you take it?

Conclusion

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• It’s very hard to change your mind / Flexibility in thinking

• If you don’t examine (impressions/feelings/inclinations) they will become beliefs

• When can you trust intuition?