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The Cognitive Bias Handbook Part II
Episode 22
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Today at a Glance
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes.
Combatting cognitive biases relies first and foremost on establishing a level of awareness of the biases, but each has its own specific combat strategies as well.
Overview, examples, and combat tactics for common biases, including Loss Aversion, Endowment Effect, Ben Franklin Effect, Availability Bias, Survivorship Bias, Ikea Effect, Hindsight Bias, Plan Continuation Bias, Gambler’s Fallacy, and Curse of Knowledge.
The Cognitive Bias Handbook - Part II
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes. I recently shared a Twitter thread covering the basics of 20 cognitive biases - but it was admittedly surface-level (280 characters only allows for so much depth and nuance on a topic!).
Last week, I went deeper, with Part I of The Cognitive Bias Handbook, covering 10 common cognitive biases, including examples and ways to combat each. Today, I will cover the remaining 10.
As a reminder, this two-part newsletter series was split as follows:
Part I (last week) covered Fundamental Attribution Error, Bandwagon Effect, Egocentric Bias, Naïve Realism, Baader-Meinhof Phenomenon, Pygmalion Effect, Confirmation Bias, Backfire Effect, Anchoring, and Dunning-Kruger Effect.
Part II (today) covers Loss Aversion, Endowment Effect, Ben Franklin Effect, Availability Bias, Survivorship Bias, Ikea Effect, Hindsight Bias, Plan Continuation Bias, Gambler’s Fallacy, and Curse of Knowledge.
This handbook is designed to be a resource you can save and come back to whenever you need a refresher. Given the volume and importance of the information, I am considering working with an illustrator to convert it into a physical/digital book that you can reference as well. Stay tuned!
Without further ado, let’s dive into Part II…
Loss Aversion
What is it?
The pain of losing something is more powerful than the pleasure of winning it.
Loss aversion was first identified by famed behavioral scientists Amos Tversky and Daniel Kahneman, who found that humans had a tendency to prefer avoiding losses over acquiring equivalent gains. Accordingly, people were typically willing to take actions to avoid losses that they wouldn’t have taken to seek gains.
Economists had previously assumed humans were rational actors - that $100 in losses would drive the same amount of pain as $100 in gains would create pleasure. Wrong. Humans are enigmatic creatures!
Examples
Investors - professional and amateur alike - exhibit loss aversion. The pain and fear of realizing a loss often leads investors to hold onto losing positions much longer than they should.
Gamblers who are in the red for a given night often risk much more to try to get back into the blac
Published on 4 years, 4 months ago