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.
Biases are either cognitive or emotional that can lead us astray. They create behavioral patterns that may interfere with our financial goals. Our decision-making may be faulty when cognitive biases interfere.
Common Biases We Need To Overcome
1. Anchoring Bias
Do your research and know the merchant’s sales strategies as well as the quality you are getting. Getting false deals is a real let-down.
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. Sometimes this is called cognitive dissonance.
3. Confirmation Bias If choice supportive bias is selective distortion, confirmation bias is about selective attention. People will remember information selectively, interpreting data to support their existing beliefs, even if the evidence is ambiguous.
4. “Bandwagon” Effect The majority of us fall for the bandwagon effect whether we consciously know it or not. The bandwagon effect (or jumping on the bandwagon) occurs when people mimic other people’s buying choices. For marketers, this phenomenon, when triggered, can propel the popularity of a certain product or service into a grand slam.
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 Avoiding what we need to do may cause us to miss deadlines such as opting in our company’s sponsored retirement plan or dealing with credit card debt getting to dangerous levels. Avoidance is somewhat akin to being a procrastinator as an easier path over making decisions in the short term.
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