If we’re willing to admit it, most of us are kind of dumb. We often don’t make the right decisions even when they are obvious to us. We’re clear about the consequences, but it seems like we’re hardwired to mess things up.
- Instead of diversifying their investments and using dollar-cost-averaging to minimize risk, people love to time the market — even when they have zero knowledge of how to do so — and end up buying high and selling low.
- Everyone knows they should sleep earlier, eat well, and move more, but most people choose to sit around and complain about how tired, exhausted, and unhealthy he or she is.
- When the only thing you should be doing is to write, you (read: me) choose to hop on to YouTube for a video about how to write better and faster.
I’m not saying this to make you feel guilty about the decisions you’ve made but frankly part of the responsibility is on us. After all, we’re the ones who make the final decisions. But please hear me correctly — only part of the responsibility is on us.
You see, beyond the decision-making formulas, the mental frameworks, and the thinking processes you have learned, there are something that are much more powerful that will impact how you decide, react, and behave. These are the cognitive patterns that humankind has evolved over hundreds and thousands of years which keep us — as a species — alive and helped us (our ancestors) navigate the world.
The only problem is that over these hundreds and thousands of years, the world has changed a great deal. What amplifies the problem is that most of the changes only happened about 500 years ago with the advent of modern human civilization. 500 years is a long time for you and me, but when compared to the 200,000 years modern humans have been evolving as a species, it’s just a blink of an eye.
That being said, most of these cognitive patterns and mental shortcuts no longer serve us well today. Worse, some of them are dangerous and harmful to us. They are being coined as cognitive errors which are part of the reason we make bad decisions that lead to adverse outcomes. And here are the top 10 cognitive errors to avoid in order to make better decisions.
1. Survivorship Bias
A logical error that inevitably leads to false conclusions by concentrating on the people or things that made past a particular selection process and overlook those who did not, typically because of their lack of visibility.
Survivorship bias happens a lot. This often occurs when you listen to the success stories in any field. You’re inspired by all the companies, portfolios, and people who made it to the top. What you don’t hear and see are those who tried and failed because generally, people don’t talk about them. And believe me, there are way more failures compared to successes.
HOW TO STAY AWAY FROM SURVIVORSHIP BIAS
Realize what’s missing and what the winners (survivors) don’t want you to know. If a winner is selling you something — his strategies, his secrets, his services — take the extra step and dig deeper into his intentions. Try to justify his self-promotion based on the reality. It works the same when you want to buy into an idea. For example, instead of believing that a specific business model is the only way to make money based on only a handful of success stories, take a step back and ask yourself what you don’t see behind the successes.
Actively look for another side of the picture by going through case studies of failed examples and talking to people who have tried but fallen short. You can also talk to people who have succeeded to find out the real price — money, time, energy — they needed to pay for their accomplishments. (It often costs more than you think) Ultimately, remembering and being aware of the bias is enough for you to make better judgments.
2. Sunk Cost Fallacy
The tendency to make decisions that are tainted by the emotional investment in the past.
As creative professionals and entrepreneurs, we’re forward thinking. We make decisions that lead to better outcome and future by carefully evaluating options and choices rationally and logically. The only catch is: we don’t.
- Investors hold on to their losing investments until it’s too late to let go.
- Entrepreneurs bet their life on an idea even when they know it won’t work out.
- Couples stay with each other when there is no way for the relationship to keep going.
Instead of making decisions strictly based on future gain, our decisions are tainted by the emotional investment we accumulated in the past. The more time, money, and energy that we invested into something in the past, the harder it is for us to abandon it when things don’t pan out the way we wanted them to.
HOW TO AVOID SUNK COST FALLACY
Embrace your mistakes and let go of the past. Instead of denying it when you made a mistake or a bad decision, admit it. Allowing yourself to make mistakes pulls you out of the downward spiral. Instead of falling into a deeper trap, you get to learn from the mistakes and failures in every different layer.
Develop a clear big picture by defining your high-level goals and visions in details. Having high-level views helps you to course-correct with better clarity and forces you to think deeply before making important decisions. It gives you better direction when you make less than ideal decisions that are not aligned with your top goals.
Reject the gift from your past self. Seth Godin has an interesting take on this. When he was asked about how to deal with sunk cost, here is how he answered:
Everything you have now is a gift from the past you. You can decide to accept the gift or not. If a project or an investment from the past you is no longer working, the now you could choose to reject the gift rationally.
I first learned about this from a YouTube video by Break the Twitch.
3. Confirmation Bias
The tendency to believe what we want to believe by seeking for and focusing only on the evidence to confirm our original ideas or assumptions.
Confirmation bias is a common mental error which occurs when a pre-existing belief interferes with the way we think, make decisions, and take action. When we have an opinion or hypothesis in mind that we believe it’s true, consciously or unconsciously, we are more likely to seek more evidence to prove it right.
We open our eyes to more positive examples which will strengthen the belief and tend to ignore everything else that disproves and violates it. We no longer perceive the circumstances objectively. We pick only a part of the data that makes us feel good because it supports our prejudices.
HOW TO THINK PASS CONFIRMATION BIAS
Collect different opinions and feedback. It’s incredibly important to get feedback from multiple perspectives especially from people who are more experienced than you.
Think like a scientist. It’s interesting how scientists think. Instead of finding evidence to prove their theory right, they actively find ways to prove it wrong. A theory or an assumption can only be true if there is no way to prove it wrong.
Focus on the First Principle. The idea is similar to thinking like a scientist. Ask yourself if your evidence is an absolute fact. If not, dig deeper to uncover the reality behind your evidence, and repeat the process until you find the absolute facts and compare it with your beliefs.
4. Availability Bias
The mental shortcuts that rely on immediate examples or options that come to our mind when evaluating a specific topic, concept, method, or decision.
We often jump to a conclusion quickly based on what is available to us immediately. It happens because our brains are evolved to make quick decisions, especially the big ones:
- People take jobs they are not proud of.
- Your friend gets into a relationship with someone they don’t like.
- Some even buy a house in a less ideal neighborhood.
Big decisions used to be a matter of life or death for our ancestors — looking for shelter, seeking food, getting away from predators — our ancestors don’t have the luxury of time to think hard about them. But things have changed. Big decisions in our lives today are those that require the most time and effort.
HOW TO AVOID AVAILABILITY BIAS
List every possible option and solution down before diving deeper into each of them, so you don’t get carried away or attached to any particular idea. During this stage, avoid organizing and prioritizing your ideas, merely brain-dump everything onto a list.
Give your ideas time to rest and come back to it again. Instead of jumping straight to an idea immediately when you have it, jot it down and come back again later. Temporarily removing yourself from the idea gives you space to get more objective about it.
Expand your horizons to get ideas from other areas or topics. The views and solutions you come up with are likely framed within the current context you have. Try thinking beyond the current context and questions to find new ideas. A great way to do this is by working in the opposite direction to see what you can get.
5. Paradox of Choice
The psychological phenomenon that at a certain threshold, when more choices and options are presented, the harder it becomes for us to choose and we are less satisfied with our final decision.
One of the biggest dogmas runs like this: If we want to maximize our happiness, the best way to achieve it is to maximize our freedom. This is because freedom is in and of itself something valuable, worthwhile and essential to every single one of us. It sounds logical. However, the truth is the opposite.
We all experience the diminishing return of happiness freedom brings to us. In a research on the relationship between happiness and income, people don’t get any happier with a pay raise at a certain income. In another study, sales dropped when more choices were presented to the customers because the customers had no idea what to choose. This made them avoid choosing at all.
HOW TO WORK AROUND PARADOX OF CHOICE
Understand the threshold of diminishing return. Find out at what point actually having more options and choices does not make a difference to your goals and stop there. You can also set a hard number of options if you don’t know the threshold for now. For example, I only shop for my clothes at Uniqlo, and this limits the choices I have and makes the decision-making process simpler.
Get crystal clear with what you really want. Regularly communicate with yourself and others — your spouse, kids, and business partners — to identify the non-negotiables and set boundaries and expectations. This way, you can filter out options quickly that don’t fit into the agreed standards.
Be content with what you have. The last solution is really to be satisfied and grateful for what you have especially with what you’ve chosen. Yes, you can always want more and better things, but instead of focusing on what you don’t have and feeling resentful about the things you have, be grateful for what’s available and focus on the actions you can take to improve.
The psychological phenomenon that an irrational or dysfunctional decision-making outcome is produced when a group of people is making decisions with the desire for harmony or conformity in the group.
It’s common for organizations and teams to fall into the trap of Groupthink when blending and fitting in becomes more important than accomplishing the objectives. Groupthink doesn’t only kill individual creativity and good ideas; it often causes more problems when none of the team members speak up even when they’re sure that a particular decision is not ideal.
HOW TO ELIMINATE GROUPTHINK IN ORGANIZATIONS
Set an environment that encourages different opinions. It’s easy for us to fall prey to Groupthink, especially at work when we’re trained not to challenge authority. If you’re an employer or manager, the best thing you can do is to encourage different opinions by recognizing them. Instead of making decisions based on authority, make it a habit of letting the best idea win — and let everyone knows about it.
Merit people with high believability. In the book Principles, Ray Dalio has a great solution for how to prioritize different opinions and inputs from a large group of people. Instead of giving every idea the same weigh, listen carefully to people who have a good track record or people who can provide a clear cause-and-effect that support his or her views.
Embrace conflicts. It’s essential to embrace differences if you want to avoid Groupthink in your organization. Let everyone know that you’re okay with conflicts and show your team a way to work together to resolve them.
7. Possibility vs. Probability
Possibility describes if something may be to happen or not to happen while probability describes how likely something is to happen or not to happen.
The failure of understanding these concepts lead to false conclusions and lousy decision outcomes. It’s difficult to wrap our heads around the idea of probability because we didn’t need it back then. Any possibility of reward or danger mattered to our ancestors because it directly impacted their life outcome. Today, we don’t just make decisions based on the possibility of an incident but by the probability of it.
Is it possible for you to win a lottery in your lifetime? Yes. But how significant is the probability? Maybe one in a billion. That’s why I don’t buy any lottery tickets because it’s said that the likelihood of a person struck by lightning is higher than winning a lottery.
HOW TO WRAP YOUR HEAD AROUND PROBABILITY
In fact, you have done the first step which is to understand the difference between possibility and probability. The next step is to actively collect data that gives you a better picture of the probability of big decisions you want to make at work and in life.
- Is it possible your new social media site idea will make you a billion dollars? Yes, but how probable is it when there are already big social media players in the market?
- Is it possible that the girl you like might become your life partner? Yes (even when you think it’s not) and the probability is high if you know how to communicate, build trust, and win her heart.
- Is it possible for you to become a millionaire by the age of 50? Yes, but not by winning a lottery ticket. Instead, by working hard, starting a business, and investing for the long-term.
8. Exponential Growth and Exponential Decay
A concept of growth or decay where the rate of change is not linear but exponential with the rate of time.
The failure to understand this concept causes us to overlook the compounding effect of tiny habits and changes — both good and bad. Again, it’s hard for us to imagine how things progress exponentially because our brains have evolved in a linear world, until recently. A few examples of exponential growth and decay:
- Moore’s Laws in computing. An observation that the number of transistors in an integrated circuit doubles every two years. This contributes to the rapid growth of computing capability and makes a pocket-sized personal computer (your smartphone) possible.
- The domino effect. A domino has the potential energy to knock down the other domino that is 1.5 times larger than it is. If the first domino is a tiny five millimeters tall and one -millimeter thick domino, the 13th is about a meter tall and weighs about 100 pounds, and the 29th domino would be as tall as the Empire State Building.
- Exponential improvement and decay of the 1%: A 1% improvement a day, every day made up 37 times the improvement in a year and a 1% decline a day made up 19 times worse off in a year.
HOW TO TAKE ADVANTAGE OF EXPONENTIAL GROWTH — AND AVOID EXPONENTIAL DECAY
It’s crucial to wrap your head around the idea of exponential growth and exponential decay. But after that, what you can do is limited. So instead of focusing on the growth or decay, shift your focus to actions that create the growth and avoid the decay. And it works best if you can automate them.
- Developing good habits. Identify the positive habits you want to develop that help accomplish the goals in all areas of your life. I would highly recommend you to start by building a winning morning routine.
- Managing and investing your money. Automate your money to save and invest in low-fee index funds for the long-term. Focus on building the habit of regular investment and take advantage of compound interest by starting as early as possible.
- Building your business. Provide great solutions and customer services. Growing your audience and customer base takes time, but good products and customer service have compounding effects as more and more of your existing customers spread the word.
9. Information Bias
The cognitive bias to seek more information even when it doesn’t affect the decision-making process and the outcome.
I get it. No one wants their plan or project to fail, and everyone wishes for the best outcome in everything they start and do. They then delude themselves into thinking that if they could come up with the perfect plan backed by the most in-depth research, they will be well off.
However, accumulating information is just a small part of any plan, the other part is implementing what you know and adapting yourself to the outcomes you get. In many cases, the full picture only becomes apparent when you start taking action and proactively collect feedback from the results.
HOW TO PROGRESS WITHOUT INFORMATION BIAS
Before you collect any data, identify the objectives for getting the information itself. Understand the purposes of the decisions you want to make help you gain a better clarity of what type of information you need. It also tells you what kind of information you don’t need and should ignore.
List each piece of information you need and don’t need. After you identify the objectives behind collecting the required information and data, get a piece of paper and pen to list everything you think you’ll need and ask why.
Set a hard limit of data collection. A great example is how writers research their books. For them, it’s about making their books perfect, but in reality, they’re resisting the things they need to do the most: Write and ship. One of the best solutions is to set a limit for information collection and force yourself into action. Remember, you can always come back to collect more information any time it’s necessary.
10. Action Bias
The mental bias to take action instead of doing nothing even when there is nothing to do. It’s usually caused by the tendency to think that value can only be realized through actions instead of patience and restraints.
Action Bias is the direct opposite of Information Bias. Instead of collecting more information and being patient, people take action for the sake of taking action. It happens a lot in both the business and investing world where teams and investors react to circumstances when all they should be doing is to wait and believe in the process.
HOW TO NOT FALL PREY IN ACTION BIAS
Consider the second and third-level consequences. Before you take action, think beyond the first-level outcome and try to look at the consequences after that. Often, it’s better not to do something.
Have a clear outcome goal. This doesn’t just help you gain more clarity on what you need to do but also tells you what you shouldn’t do.
Consider the opportunity cost and learn to prioritize. Whenever you spend your time or money on something, you can’t spend the same time or money on something else. Understanding the opportunity cost stops you from hopping on just any action that comes into your mind. Instead, you can start to give these ideas deeper thought and prioritize each of them.
Final Takeaway: Awareness is Everything
Now that you’ve learned these cognitive errors and mental flaws, here is an unfortunate truth: We don’t have a solution to fix and cure these errors — not now, maybe in the future but definitely not in our lifetime.
The best solution is to be aware of them and avoid them with regular retrospection and ongoing experiments. In many cases, we don’t know what contributes to a good decision we’ve made. There is no way for us to reverse-engineer a perfect outcome because there are just too many factors that contribute to the results which might include luck and time.
However, what we know for sure are the things that lead to false conclusions and bad decision outcomes. This realization shows us the potent role of what is known as negative knowledge (what not to do) when most of us are actively seeking for what to do.
In this article, I’ve proposed a few solutions to avoid these common cognitive errors. But ultimately, what matters most is the newly added layer of awareness to your cognitive patterns and mental shortcuts which might well be the biggest obstacle between you and your version of success.