How to Overcome Biases In Financial Situations

Learning how these biases work is a first step to guarding ourselves against becoming irrational when managing money when we want to save, be more rational shoppers, and invest.

What Are These Biases? Biases are either cognitive or emotional that can lead us astray. They create behavioral patterns that may interfere with our financial goals.

Emotional biases are ingrained in our brains and may be harder to overcome than cognitive biases.

1. Anchoring Bias When shopping, anchoring, a cognitive bias occurs when we place a lot of value in the first information we get. We often rely on the listed price when we make price comparisons.

2. Choice Supportive Bias Sometimes referred to as buyer’s remorse after making a particular purchase, choice supportive bias helps us to justify that discomfort we may feel postpurchase.

3. Confirmation Bias “I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do.”       Charlie Munger.

4. “Bandwagon” Effect The majority of us fall for the bandwagon effect whether we consciously know it or not.

5. Framing Effect We often make decisions influenced by the presentation of information. Is the glass half-full or half-empty? Risky situations use framing.

6. Ostrich Effect Ever want to avoid bad news? You start to distract yourself with nonsense work, putting your head in the sand like an ostrich.

7. Overconfidence Bias Aka Dunning-Kruger Effect This bias is when people believe they are smarter and more capable but they do not have the self-awareness to recognize it.

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