Cognitive Biases on Economic Decisions

Cognitive biases systematically influence people’s decision-making capabilities and can expose them to vulnerabilities such as inaccurate, suboptimal, and wrong decisions. Undeniably, the human brain is powerful but is subject to limitations resulting from cognitive biases. These biases manifest in different ways. Some are related to one’s memory, influencing how people remember events, and this can lead to biased thinking and decision-making. Additionally, some biases are pegged on people’s limited attention capability. Since attention is an inherently scarce resource, people become selective about what they can recall, leading to potential bias in executing vital decisions. Notably, biases manifest subtly. One may think they are making the right decision, yet biases influence how they see the world. Some common cognitive biases include anchoring and confirmation biases which can greatly affect how people make economic decisions.

Confirmation Bias

Confirmation bias is one of the cognitive biases that affect decision-making. This type of bias is characterized by being confident about one’s convictions, such that one selects, interprets, and remembers only the information that confirms what one believes in (Korteling et al., 2023). It is associated with the tendency to pursue self-interests over shared or community interests in what is commonly known as the tragedy of the commons. Additionally, confirmation bias is characterized by the endowment effect and sunk cost fallacy (Korteling et al., 2023). To that end, the bias makes people overvalue the things they possess, and there is a strong urge to persist in actions that entrench underlying obsession with material things, eventually leading to negative outcomes.

The confirmation bias has affected my decision-making abilities as an investor for a long time. I have harbored this irrational behavior of investing in things I am emotionally attached to, yet emotions have no space in making financial decisions. The bias has obliged me to think that SACCOs are the best investment opportunities for a small-time investor, ignoring emerging platforms such as money market funds. Even in this digital era where one can get a lot of information through the Internet, confirmation bias has only led me to research bias, such that I only search about SACCOs and the existing investment options within SACCOs. Additionally, biased interpretation has crept into my decision-making ability, so I tend to disregard any new information that contradicts my beliefs. For instance, when I search for investment options in SACCOs, I encounter additional information on alternative investments such as bonds, but I ignore it. As a result, I ended up with biased recall, only remembering information that backs up my trust in SACCOs and completely ignoring any other information I encountered.

Anchoring Bias

Another type of bias that negatively influences one’s decision-making ability is the anchoring bias. It refers to overreliance on the first information piece people encounter, ignoring any subsequent pieces of information that could potentially lead to optimal decisions (Lieder, 2017).  Despite the inaccuracies that may be evident in the anchor’s information, the bias makes people use it as a reference point (Lieder, 2017). Anchoring bias leads to suboptimal decisions in different areas of life, such as salary negotiation, shopping decisions, and nutritional habits, among other key life aspects.

I experienced the anchoring bias when I went to purchase a laptop. Initially, the laptop dealer introduced high-end options on one of the shelves in his shop. The line contained expensive laptops I could not afford since I was on a budget. I was shown relatively affordable options after informing the dealer that I was looking for on-budget options. Having noted that the prices in the low-end line were within my budget, I paid for one even without negotiating. Afterward, I realized that my irrational decision as I anchored my purchase decision on the expensive laptops (anchor) I saw from the outset.

Mitigating Biases

According to Schwind and Buder (2012), confirmation bias can be mitigated by talking to another party to learn a different perspective. This may involve approaching someone known to have an open mind to learn new perspectives. For instance, I could have approached multiple successful investors in my locality and virtually and sought their views on optimal investment options. This would have opened my mind to better investment opportunities apart from SACCOs.

On the other hand, anchoring bias may be mitigated by seeking diverse viewpoints before making a final decision. Having diverse options in mind can help one evaluate their options and make an optimal decision free from the anchor’s effect (Korteling et al., 2023). For instance, I would have avoided being ripped off while purchasing my laptop by visiting multiple stores. That way, I would have received multiple offers, evaluated them, and made a more balanced decision before purchasing the device.

Conclusion

The human brain is strong but susceptible to biases that lead to suboptimal and inaccurate decisions. Key contributors to cognitive biases include selective attention and poor memory. Some of the common biases are confirmation and anchoring biases. Confirmation bias leads to people’s obsession with what they believe in, even when it is evident that that is not the accurate position. On the other hand, the anchoring bias refers to overreliance on the first piece of information they encounter. Both biases negatively affect economic decisions such as investment and shopping choices.

References

Korteling, Johan. E. (Hans), Paradies, G. L., & Sassen-van Meer, J. P. (2023). Cognitive bias and how to improve sustainable decision making. Frontiers in Psychology, 14(1129835). https://doi.org/10.3389/fpsyg.2023.1129835

Lieder, F. (2017). The anchoring bias reflects rational use of cognitive resources. Developing tools and theories for helping people make better decisions View project Cognitive Control Costs View project. https://cocosci.princeton.edu/papers/AnchoringSimulations.pdf

Schwind, C., & Buder, J. (2012). Reducing confirmation bias and evaluation bias: When are preference-inconsistent recommendations effective – and when not? Computers in Human Behavior, 28(6), 2280–2290. https://doi.org/10.1016/j.chb.2012.06.035

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Choose two cognitive biases that you have observed in your own decision-making or in someone close to you (e.g., anchoring, overconfidence, confirmation bias).

Explain how these biases influenced the decisions. Support your analysis with findings from academic research and discuss potential ways to mitigate these biases, referencing your personal examples.

Cognitive Biases on Economic Decisions

Requirements:

• Your paper should have a minimum of 700 words and not exceed 1000. Title and references pages do not count towards minimum word requirements. Generally, this will result in approximately 2-3 pages in length, double-spaced, using APA 7th edition format.
• Use at least three scholarly articles or research papers. Blogs and opinion articles may be referenced but are not considered scholarly articles. Make sure you do research and find at least three actual scholarly articles.
• Include an introduction, body paragraphs with clear arguments and evidence, and a conclusion
• Incorporate personal experiences or local examples as required by the specific prompt
• Be sure to cite all sources appropriately