15 Hidden Cognitive Biases That Cost You Big Money

You’re not rational. I’m not rational.

We’re emotional. Sometimes we’re annoyed. Sometimes we’re angry. Sometimes we’re just hangry.

We’re really no different than any other animals, except we can tell stories, and our decisions are affected by our emotions and part of that includes our biases.

Understanding these biases and how they affect our lives can be a game-changer.

Availability heuristic

What we know is given more weight than what we don’t.

The best example of this is the idea that something generally seen as bad for you (drinking, smoking, obesity, etc.) isn’t that bad because you know people who live long lives in spite of the condition. You know a person who routinely never wears a seatbelt and has never gotten hurt (yo, seatbelts save lives).

How does this cost you? 1. Wear a freaking seatbelt. 2. Do your homework, especially if all the information you have at the moment was provided by someone else.

You can be led astray and make poor financial choices because you don’t have enough information and have overvalued what you do have.

Anchoring

Anchoring is our tendency to overvalue the first piece of information we get when making any kind of decision. Once that anchor is established, all future decisions are made with a bias towards that initial anchor regardless of its accuracy.

How does this cost you? Have you ever met someone who has invested in actively managed mutual funds? The average expense ratio for an actively managed mutual fund is around 1.5%. Whether or not that sounds high to you depends on how much you know and many people’s first experience with mutual funds was in a 401(k) – where 1.5% is not expensive. It’s not cheap but it’s not ridiculous.

Actor-observer bias

The actor-observer bias is when you look at your actions and attribute them to external causes but look at someone else’s actions and attribute them to internal causes. It’s called the fundamental attribution error and it strongly affects how you interact with other people.

Sometimes there are external forces at work that you can’t control but often your choices are your own.

How does this cost you? This hurts you most when you attribute your own bad choices to environmental or other factors beyond your control. Sometimes there are external forces at work that you can’t control but often your choices are your own.

... Keep reading on Quick and Dirty Tips