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Starting the journey of improving decision is daunting, the mental equivalent of taking the first step on a walk across America. Given all of the innate characteristics people share that make effective decision making a challenge in a rapidly changing world we are not naturally adapted to. Although recently I’ve realized looking backwards can be […]
Ever finish a book you couldn’t stand? Or remain glued to a seat in a movie theater even though the movie you were watching was an insult to cinema. Then you have first-hand experience with the sunk cost effect Once spent money should no longer influence the future course of action. Because of a […]
Thinking about money is hard. Because it is challenging people tend to take short cuts when making decisions. Primarily they lock in certain gains when available and do anything to avoid a certain loss. This tendency is referred to by psychologists as the certainty effect. The certainty effect is fueled by our natural desire to […]
Wall Street Traders and extreme couponers are alike because of their skill at valuing money on an absolute basis. Most people struggle with this and tend to evaluate things relatively based on reference points. Great traders move past the relative framework in their decision making process. For example, there is an 80% chance the […]
The Anchoring effect occurs through relying too heavily on the first piece of information obtained in the decision making process. Typically subsequent information will be processed in relation to the anchor instead of independently. So for example in a negotiation the initial price offered dictates how subsequent offers are perceived instead of an independent evaluation […]
Availability Bias is the tendency to overweight recent information in decision making. Dramatic events that rarely occur are especially impactful because they are more easily recalled. It is becoming increasingly problematic for modern day decision making given the volume of information that needs processed. People are also susceptible to the availability bias when we […]
The Framing Effect as outlined by Prospect Theory indicates people make different decisions based on whether a choice is presented as a gain or loss. Don’t do this. You need to examine decisions from both perspectives to ensure you have properly thought through your options. A famous example from the pioneers of Prospect Theory, Daniel […]
It’s natural to think bad things won’t happen to you. This is problematic because it leads people to mentally underweight their exposure to potential external negative events versus their actual probability. Given the natural inclination to think of yourself as special and not subject to the whims of fate. This presents itself in […]
People are prone to actively avoiding information contradicting their existing beliefs. People are also very good at lying to themselves. So when we are exposed to information contradicting existing beliefs we develop complex internal monologues explaining away the validity of the new information. Not surprisingly this impedes good decision making. To overcome this it is […]