12+ Decision-Making Biases (Cognitive Biases Explained)

— Researched and written by Dr. Sandip Roy.

On average, we make around 35,000 decisions a day. But most of these occur without our conscious knowledge. These unconscious ones form the bulk of our decision-making biases.

Our bad choices and irrational behaviors are often the result of our mistaken beliefs. They are like bad circuitry in our brains based on half-baked information.

“A dolphin thinks Michael Phelps is a sloppy swimmer. A cheetah thinks Usain Bolt is a sluggish sprinter.”

We make spectacularly bad decisions while thinking we’re being wise. We think we’re passing fair judgments on others, without being biased.

But we realize how much of a mistake our decisions were when the results are a complete mess. Only then do our decision-making biases become obvious, and we start flogging our flawed strategies.

Hey, I didn’t say “Theranos” but Nutt (2002) tells us that 50% of all business decisions fail.

And we judge again … based on ghosts from our past.

A decision marks the end of deliberation and the start of the action. It’s like this: You think for a while, reach a decision, and start action (procrastination is when you don’t start action).

12+ Cognitive Biases In Decision Making

Here we take up some of our deadliest biases that can lead us to make some disastrous decisions. You will be shocked to know how common some of our cognitive biases are.

Let’s look at 12+ common decision-making biases:

1. Sunk cost fallacy

Sunk cost fallacy is a decision-making bias that makes it hard for us to give up on a loss-making venture because it has already cost us money and time.

Also, called sunk cost effect, it is a “tendency to continue an endeavor once an investment in money, effort, or time has been made.”

Each time you want to give up, you invest more in it thinking it will ultimately recover your losses.

You justify the further investment based on previous investments, despite new evidence indicating that the original decision was actually wrong.

This bias creates a need for people to keep putting more effort and resources into a failing project, mistakenly thinking, “The only people who fail are those who give up.”

They forget that “quitting” can be just as valuable “gritting,” and that it may be wiser for them to pursue something else that could bring them more success.

2. Endowment effect

The endowment effect says that the more people think something is worth, the more of it they want.

This is simply putting a higher value on what you own than what you don’t.

For example, you may decide that a dollar in another person’s pocket is worth 90 cents, but the same dollar in your pocket is worth 110 cents.

This can be seen in many experiments with both buyers and sellers. The endowment effect also occurs when someone possesses something valuable, but it is taken away from them without compensation.

The endowment effect can be found when people are given an object and then evaluate its worth in comparison to when they were not given the object in question. The objects that are given often have a higher perceived value than those that are not, regardless of their original price or market value

A good trick to counteract this bias is to see the apparent inconvenience of giving up an object as lesser than the usefulness of continuing to hold it.

3. Status quo bias

In some ways, we all desire to keep things the same. This emotional need to stick to previously made decisions is a natural bias.

Status quo bias is the tendency of people to like things to stay in their current state. This preference comes from their familiarity with present and default situations.

Familiarity plays a huge role in status quo bias because when people are exposed to a thing for a long time, they get used to it so much that they don’t want anything else in its place.

Loss aversion, the natural tendency to prefer avoiding losses to making similar gains, is the primary reason behind a status quo bias. People are inherently afraid of the unknown, which they think might bring in a loss.

John Travolta said he would never want to take on any role other than his iconic character in his comeback film, “Pulp Fiction.” That was somewhat of a status quo bias.

“A ‘please’ would be nice.” — Vincent Vega, Pulp Fiction

However, status quo bias is not necessarily always bad because it can be helpful when one is trying to maintain a consistent image or a brand.

4. Confirmation bias

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

Confirmation bias reflects our desire to support or confirm our previously held views while dismissing those that contradict them.

We are naturally prejudiced against new ideas and points of view. It causes us to underplay what we want to ignore while exaggerating what we already know, whether in relationships, politics, or business.

Letting cognitive bias cloud our opinions and judgments is like operating out of an echo chamber.

It leads us to follow only those on social media who agree with us. It compels us to seek out news sources that tell things from the perspective to which we subscribe.

To combat this bias, you need to be open to and actively seek alternative viewpoints, and regularly ask yourself what could make you change your mind.

5. Hindsight bias

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

The hindsight bias, also known as creeping determinism and the “knew-it-all-along” effect, is the tendency to see events as more predictable than they actually are, forecasting a result that cannot be predicted.

It is a retrospective prophecy, where one declares something was bound to happen, but only after it has happened.

Hindsight bias operates on three levels.

  • The first is memory distortion, which occurs when a person distorts and misremembers an earlier opinion or judgment.
  • Second, they believed the occurrence was inevitable.
  • Third, the event’s predictability was so certain that they could have predicted it.

A person suffering from this bias may have a mistaken sense of superiority, an overvaluation of their intelligence, or arrogance about the effectiveness of their ideas and decisions. It causes people to bury past reservations, leading them to risky and ill-informed decisions.

To counteract this, we can record our predictions and pause to evaluate our predictions.

6. Anchoring bias

This bias is being influenced too much by the first piece of information we hear.

Anchoring bias is the tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.

Anchoring bias occurs when people rely too heavily on the initial piece of information offered (the “anchor”) when making decisions.

Anchoring typically occurs over time and in overly controlled situations, making it difficult to control and counterbalance.

This is especially problematic In negotiations. To combat this, we can take a step back to postpone our decision and use it offensively to build the anchor while negotiating with others.

7. Misinformation effect

Have you ever recalled an event differently than another person in the same situation? Then you could have added details that never happened.

The “misinformation effect” is a term used in cognitive psychology to explain instances where misleading data is purposefully included in a historical account.

The “misinformation effect” describes how we may distort a person’s understanding by introducing false data after they have received the correct information.

Research into this bias shows how psychologically vulnerable we are to fake news, false memories, and entrenched cognitive biases.

Elizabeth Loftus’ study has shown that memory is far more easily influenced than previously thought (Loftus, 2003).

“Falsehood flies. and truth comes limping after it.”

– Jonathan Swift

To fight this bias, we must actively ask questions rather than passively consume information served to us, and we must listen patiently to other people’s points of view.

Of course, admitting that we can be swayed by fake and tainted news is the first step toward minimizing its effect.

Explained in 60 Seconds: The Psychology of Misinformation

8. 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?

For example, you may tell others that you failed the test due to post-viral illness, but you may also tell others that someone else failed because they didn’t study.

In social psychology, actor-observer bias, also known as actor-observer asymmetry, refers to our tendency to attribute the other person’s conduct to his own disposition while attributing our own behavior to the situation we’re in.

Depending on whether we are the actor or the observer in a situation, we make different attributions.

We (“actors”) see our own intentions objectively, but evaluate the intentions of others (“viewers”) ambiguously.

This bias reflects how people use different narratives to make sense of their own v/s others’ lives.

As a result, they often do not hold themselves accountable for their actions, instead attributing them to someone else’s action or intentionality.

Actor-observer bias often gets confused with fundamental attribution error (FAE). However, FAE doesn’t take into account our own behavior.

9. False consensus effect

We overestimate the extent to which people agree with us. We spend time with people who share our ideas. Furthermore, we don’t seek out other people’s perspectives.

The false consensus effect (FCE) is a phenomenon in which people falsely believe that their judgments, beliefs, behaviors, and opinions about an idea or statement are more popular than they actually are.

FCE is often attributed to our desire to view our thoughts and actions as appropriate, normal, and correct.

It is so natural for us to assume that others have had similar experiences and opinions to us. But it’s critical to keep reminding ourselves that not everyone thinks the same way as we do.

A typical example of the false consensus effect is the following sentence:

“My own opinion on this issue is not important, what matters is how many people have the same opinion as me.”

– (Meanwhile me: “Whoa!” with an uprolling eyes emoji)

10. Halo effect

Have you ever met someone you didn’t like? If so, you may have been a victim of the halo effect.

The halo effect, first suggested by Edward Thorndike, is a cognitive bias in which our overall impression of someone influences how we perceive their individual traits.

In a way, our first impression of someone can “halo over” our judgment of their other qualities.

We tend to link positive traits with other positive traits. Our good impression of one thing spills over to other related things.

The halo effect can have a telling impact on our decision-making.

Some examples of the halo effect:

  • We are more likely to perceive a rich and successful person we know as intelligent, kind, and foresighted.
  • A physically attractive job candidate is more likely to get hired, even if they are not the most qualified one.
  • A well-dressed person is also seen as being more competent and trustworthy.
  • A singer we like may also be seen as a good person in real life (even if all that public persona is a paid media creation).

Find out How “The Halo Effect” Influences Our Relationships.

11. Self-serving bias

Self-serving bias (SSB) is a bias in which an individual perceives his or her own actions to be more beneficial than others.

A person may believe the success of their work is due to their own hard work and abilities, when in reality, they are just lucky.

You passed because you are intelligent, but you failed due to an external force.

Self-serving bias protects our self-esteem, but it also allows us to engage in malicious behavior in which we blame others for our personal failures (like narcissists do in their relationships).

This can also be seen when someone believes they are less likely to fail than others, when in reality, their chances of failure are exactly the same.

Self-serving bias can occur when someone feels like they need to put themselves in a positive light to maintain their self-esteem or self-worth.

12. Availability heuristic

The availability heuristic is a mental shortcut that relies on how easily we can recall an event or item.

We estimate the probability of an event happening based on how easily instances of the event come to mind.

It’s like this: The more we know about something, the more likely we are to consider it possible.

Also known as the frequency or familiarity heuristic, this is one of the most common cognitive biases that are seen in many people.

For example, we may be more likely to believe that shark attacks are a common occurrence because we can easily recall recent news stories about shark attacks. However, the actual probability of being attacked by a shark is very low.

We can avoid the availability heuristic by looking at the trends.

This means considering all of the available information, and not just the information that is most easily recalled.

For example, if we want to know the probability of being attacked by a shark, we should look at statistics on shark attacks, not just news stories about shark attacks.

13. Optimism bias

Optimism bias is our tendency to overestimate the likelihood of pleasant things while underestimating the probability of terrible things. When we have this bias, we frequently overlook the risks.

Optimism bias can make us over-optimistic. It is related to the concept of positive illusions, which are beliefs that are overly positive and unrealistic.

People with this bias often perceive themselves to be less at risk than others.

For example, optimistically biased people may overestimate their chances of winning the lottery, being in a car accident, or being diagnosed with a serious illness.

There are a few reasons why we might have an optimism bias:

  • One, we tend to focus on positive information and ignore negative information.
  • Two, we may have a natural tendency to see ourselves in a positive light.
Is our brain hard-wired to be optimistic? - BBC REEL

Interestingly, optimism bias can have both positive and negative consequences. It can motivate us and raise our hopes. And it can also lead us to take unnecessary risks and rush into decisions.

Overoptimism or Optimism Bias: When Optimism Isn’t A Happy Thing

14. Dunning-Kruger effect

The Dunning-Kruger effect is a cognitive bias in which the more incompetent someone is, the more likely they tend to overestimate their ability.

This bias is often seen in those new to a skill or task.

These newbies have limited knowledge or experience. So, they can’t accurately assess their abilities in the domain. And think they are better than they are.

The Dunning-Kruger effect is named after David Dunning and Justin Kruger.

They found that people with low ability in a particular area tend to make more mistakes than people with high ability. However, they are also less likely to see their mistakes due to a lack of knowledge and experience.

“This meta-ignorance (or ignorance of ignorance) arises because lack of expertise and knowledge often hides in the realm of the “unknown unknowns” or is disguised by erroneous beliefs and background knowledge that only appear to be sufficient to conclude a right answer.”

– David Dunning, The Dunning–Kruger Effect: On Being Ignorant of One’s Own Ignorance

The Dunning-Kruger effect can have a number of negative consequences. For example, it can lead to poor decision-making, overconfidence, and a lack of motivation to learn.

It can also make it difficult for people to improve their skills at work, as they may not be able to recognize their own weaknesses.

The Dunning-Kruger effect can affect a person’s self-rating of how successfully they can engage in entrepreneurial behavior, known as entrepreneurial self-efficacy (Joeri van Hugten & Wim Coreynen, 2023).

Interestingly, when we practice a skill or task regularly, the Dunning-Kruger effect fades away.

What are biases in decision-making?

Biases in decision-making are systematic errors in judgment that affect the choices and judgments we make. These biases often operate at a subconscious level, influencing how we perceive situations, evaluate options, and make decisions.

So, basically, a bias is our tendency to make snap judgments based on little information. They can stem from cognitive shortcuts, emotional influences, or social pressures.

Biases can influence how we view a person’s feelings, thoughts, opinions, and actions. Human biases in decision making are the fallacy of drawing conclusions without taking into account all aspects of a situation.

Why do we have biases?

Our cognitive biases find triggers in our unconscious mind, and this urge is designed to satisfy some psychological need. This urge is so strong that even a period of self-reflection cannot impact our decisions (Domeier & Sachse, 2018).

Three things that most significantly impact your decision-making processes:

  1. Selective perception: the tendency to ignore things that contradict our views or cause emotional distress.
  2. Public opinion: ideas and opinions of others that shape how we decide what’s good or bad for us.
  3. Heuristics: the mental shortcuts that shorten our decision-making but often lead to cognitive biases.

What is an example of decision-making bias?

One classic example of decision-making bias is the “Gambler’s Fallacy.”

This is the belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future, or vice versa.

For instance, if a coin flip results in “heads” five times in a row, the Gambler’s Fallacy would lead one to believe that the next flip is more likely to be “tails,” even though the probability remains 50-50.

How to manage your decision making biases?

So, how can you control the impact of cognitive distortions on your choices?

You control it using materials and methods proven to help avoid the trap of biases in decision making.

  • Materials could include research articles, books, or even decision-making frameworks like SWOT analysis.
  • Methods might involve techniques such as the ‘Five Whys’ for root cause analysis or using decision trees to evaluate different courses of action.

The ‘Five Whys’ technique helps with the awareness of common cognitive and decision-making biases. By asking ‘Why?’ five times, you can drill down to the root cause of a problem.

This method can prove crucial for strategic success, as it helps you understand the underlying issues that may be clouding your judgment.

Next, an attitude of being proactive in seeking other people’s opinions and more data can help you make better decisions and minimize the effects of cognitive biases.

Three quick tips for managing biases in decision-making:

  • Be aware of your own biases. The first step in managing any bias is to be aware of it. Once you know you have a bias, you can start challenging your thoughts and beliefs.
  • Consider other possibilities. When you’re making a decision, don’t just focus on the positive or favored possibilities. Take some time to consider all the potential outcomes, both good and bad.
  • Talk to others. Sometimes, it can be helpful to talk to others about your thoughts and feelings. This can help you to get a different perspective and see things more clearly.

Are there any benefits to our cognitive biases?

Some of our cognitive biases can lead to beneficial results:

  1. Sunk cost fallacy: It could propel success by pushing us to take more risks in our ventures since success is often the result of grit in the face of losses.
  2. Confirmation Bias: It can boost self-confidence and motivation in certain situations. If you’re convinced your startup idea will succeed, you’ll put in the effort to make it work.
  3. Overconfidence Bias: Overestimating our abilities can also serve as a self-fulfilling prophecy. If you’re overconfident about acing a job interview, that confidence might shine through and impress your interviewers, leading to a job offer.
  4. Availability Heuristic: This bias to overestimate the likelihood of events can make us more cautious and prepared for risks and failures, based on setbacks we recently encountered or heard about. Thereby, helping us avoid similar pitfalls.

Final Words

People are more likely to have a good opinion of others who are similar in some way — for example, they might have similar political beliefs or enjoy the same activities. This is the Social Similarity-Attraction bias.

This article got long; otherwise, I’d have liked to have mentioned some more:

  • Planning Fallacy: It makes us miscount time for a task, causing procrastination).
  • Zeigarnik Effect: It motivates us to worry about and resume unfinished tasks.
  • Recency Bias: It’s the tendency to weigh the latest information more heavily than older data.
  • Hindsight Bias: The tendency to believe, after an event has occurred, that we would have predicted or expected it.
  • Negativity Bias: It makes us focus more on negative outcomes or risks, often leading to overly cautious decision-making.
  • Framing Effect: The urge to make different decisions based on how the same information is presented.
  • Groupthink: The tendency to conform to the opinions or decisions of a group, often at the expense of individual critical thinking.
  • Overconfidence Bias: The tendency to overestimate our abilities and the accuracy of our predictions.

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