How to Overcome Biases In Financial Situations

We all have biases–cognitive and  emotional– that may cloud our judgment when making day-to-day decisions,  especially about our finances.

We often depend on our intuition, but sometimes we are unaware of how our gut feeling may be faulty.

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.

1. Anchoring Bias

When shopping, anchoring, a cognitive bias occurs when we place a lot of value in the first information we get.

Sometimes referred to as buyer’s remorse  after making a particular purchase, choice supportive bias helps us to  justify that discomfort we may feel post-purchase.

2. Choice Supportive Bias

If choice supportive bias is selective distortion, confirmation bias is about selective attention.

3. Confirmation Bias

This psychological trait influences consumer behavior even when the product has features we don’t need.

4. “Bandwagon” Effect

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

5. Framing Effect

Coined by Galai & Sade in their 2006  study, the  ostrich effect means “avoidance of apparently risky  financial situations by pretending it doesn’t exist.”

6. Ostrich Effect

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