cognitive bias is a part of our unconscious of our thought process. Because of the complexity of life and complex, we are prone to create mental shortcuts that cause us to make potentially unlogical judgements or choices because we’re in a state of mind that isn’t able to perceive the entire view. While we don’t realize this is happening, we are too influenced by certain assumptions that we lose our capability to be completely neutral and uninfluenced by prejudgment.
There are a lot of preconceptions that guide our decisions. In the case of your financial situation, these biases can result in you spending many dollars.
Common Biases that cost you money
Biases are often operating in groups. It is common to observe that your choices are influenced, in major in part, from a myriad of the corresponding biases.
Status Quo Bias
A bias based on status quo is the tendency to continue following the same path you’re currently taking. You’re used to the way things are as well as the decisions your made previously, and so you tend to be influenced by the same old routines.
It can be the concept of loyalty to a brand – you might find yourself buying from a few companies , not because their offerings are top of the line or even the best fit to you but rather because they’re the ones that you have purchased from previously.
Confirmation Bias
Confirmation bias happens the case when you’re seeking answers, but that you “know” all the solutions, and what you’re actually looking for is data that supports your beliefs to be the case.
Confirmation bias can hinder your ability to make rational decisions. If you enjoy buying at Best Buy, for example due to the fact that it’s the place you’ve always gone to shop (status the status quo bias) You’ll be more likely to be attentive to evidence that suggests of shopping in Best Buy is a good choice, and less open to data that suggests otherwise.
Self-Serving Bias
Self-serving bias is the belief that positive things happen because of decisions you’ve made, whereas bad things occur due to reasons beyond your control. If you finish your month with a surplus, it’s because you made a good plan and then executed it. If you don’t have enough money during the month, it’s because of something that happened and there wasn’t much you could do to change it.
The truth, of course is somewhere in the middle. However, if you give yourself too many praise for the good as well as not giving enough credit for the negative you don’t really comprehend or accept the fact that you require assistance or that things have to be changed.
Unlocking Your Bias
There are many various biases that exist however from a financial viewpoint, the biggest issue of cognitive biases is it blocks your from learning and growing. If you’re influenced to make certain choices, you block yourself from alternatives and options that could be better for you.
There’s a reason why advertisers are acutely aware of the impact that cognitive bias can have on the audience. Through manipulating your unconscious beliefs, they can influence you to make decisions that aren’t really in your best interests (even when you think you are). Take a moment to consider your own beliefs and how they affect how you manage your money. What are the reasons behind these choices? Are you allowing yourself take a look at the bigger of the picture?
Start by challenging some of the assumptions that guide your spending:
- Why do you go to one place and not the other?
- What are the key factors you cite when you justify your financial decision-making?
- What are the most important factors?
- What else can be done to ensure that these factors be met?
- What other aspects could be more relevant?
Bias is a key factor in the way we think and make decisions. It’s not necessary to change all of your habits however, you must strive to understand the reason behind that drives the choices that you make. Every saving, spending, and investment decision you make is crucial. One of the most important things that you could do is to give yourself the full facts.
