Advertising
Advertising

Three Cognitive Biases That Cost You Money, Stress, and Happiness

Three Cognitive Biases That Cost You Money, Stress, and Happiness

Lets start with a simple question: how many of each animal did Moses take into the ark? If you pounced with the answer “2,” you have fallen into the same trap as most people. (The answer is zero—figure the rest out yourself.) Cognitive biases tell us we know when we don’t, create absurdly optimistic estimates of what we can achieve, and keep us stuck in bad relationships and bad jobs.

Here are three biases and some strategies for getting out of the trap they set.

1. The Sunk Cost Fallacy

Imagine you have a ticket to the movies for which you forked out 10 bucks, but you are attending with a friend who got hers for free.  The weather turns sour and they are re-running Dukes of Hazard.  Which one of you is more likely to cancel?  If you say “my friend, duh,” you are trapped by the sunk cost fallacy.

Your ten bucks is gone (assuming you can’t plead a refund).  Since you are out ten bucks whether you go or not, it should not affect your choice.  What matters is the cost-benefit of braving the weather, and whether your movie features more interesting characters than Boss Hogg. (Unlikely. Still.)

Advertising

The sunk cost fallacy traps people in bad relationships, bad investments, and traps countries in destructive, no-win wars.  (“We can’t withdraw because we have spent billions and people have given their lives.”)  What matters is the future—whether you can turn the relationship around, or whether the next billion dollars and young lives will be squandered in vain.

The sunk-cost fallacy is an example of a cognitive bias—a habitual, predictable, way of thinking that leads to error.  Wiki lists over 100; it seems the amazing human brain has many hard-wired flaws.

Some of these flaws may have conferred an evolutionary advantage.  Who knows what the exact conditions were five thousand years ago, but the hard-wiring of our brains may not have changed quickly enough to keep up with the white-heat of cultural and technological evolution that has happened in the last 5000 years (a blink of an eye in genetic evolution).

Conquering the sunk-cost fallacy is very tough.  Who has not poured time and money into something and wished they hadn’t, only to pour more in on the next occasion?  We like to self-justify (to believe that we made good decisions in the past); who likes to say “I was a fool then”?  Then, we look for confirming evidence things are going our way.  “He stopped drinking for a week, and had a job last year.”

Advertising

One technique is to create an imaginary scenario.  Imagine you parachuted into the (house, relationship, investment) for free, with nothing invested.  What would you do then?  If the answer is “run for the hills,” then you have your answer.

2. The Planning Fallacy

A second bias which causes enormous stress is the “planning fallacy.”  Humans suck at estimating how long things will take. Partly, we like to believe we are super-human, but mostly we are deluded about how complex things get.  As a writer, I’m constantly amazed that the last 5% of a project takes 30% of the time.  The average overrun on big technology projects is 27%, and many really big ones overrun by one hundred percent or more!  A group of students were asked to estimate how long a term paper would take, their “best case” guess was 29 days, and the “worse case” (excrement hits the fan) was 48 days.  They took an average of 55 days!

tough decisions

    How much stress and misery, I wonder, comes from people in offices saying “I can do it by Friday,” only to find that a couple of more Fridays are required?  We like to people-please, and to look confident and competent, but we are incompetent at estimating how long things take!

    3. Optimism Bias

    Our final bias rears its head in conflict situations, where everyone is sure of their “facts” and confident in their predictions about how different actions will pan out.  This family of biases means we take a rosy view of our knowledge, and a dim view of other’s.  Nobody is as right as they think they are.

    Advertising

    Professor Philip Tetlock has studied expert predictions over a lifetime.  He found that experts (real experts, not talk radio experts) who were 100% sure of an outcome were wrong 25% of the time.  Further, when they thought an outcome had “no chance,” it happened 15% of the time.  What percentage of people are above average listeners?  96%!

    This “confidence without competence” is one cause of conflict running out of control.  People who are dogmatically sure of themselves beget adversaries who become similarly dogmatic. The next time you are in a conflict situation, make a table with two columns; write the facts (as you see them) in one column, and your opinions and conclusions in the other column. Ask your adversary to do the same (nicely!).  Check off the facts on which you agree, and where you disagree. Do some homework together.

    The difficult part of resolving conflict lies in the area of opinions, interpretations, values and predictions, so you are only part of the way there.  But going through the process of developing a shared set of facts will diminish the polarization, and allow you to get down to business.

    Learning about our biases can help.

    The sunk-cost fallacy keeps us stuck in a miserable past, throwing good time and money away after bad decisions. The planning fallacy creates tremendous stress as we struggle to meet unrealistic deadlines. Optimism biases make us feel sure of ourselves when we have no right to be, which leads us to prolong and exacerbate conflict.

    Advertising

    We didn’t learn these things in school because they were not well understood, were not part of any college curricula (unless behavioral economics gives you jollies), and certainly far from mainstream understandings of how humans work.

    Learning about our biases puts us back in the game.  Like sharpshooters who correct for wind velocity and direction, knowing our thinking is skewed in a particular direction means we can auto-correct, make better decisions, and get more of what we want in life.

    More by this author

    Cognitive biases and decisions Three Cognitive Biases That Cost You Money, Stress, and Happiness Three things a skeptic should know about neuroscience Forget Resolutions: If You Only Do One Thing to Get Ready for 2014, Do This!

    Trending in Work

    1 10 Key Characteristics of a Highly Successful Entrepreneur 2 Feel like Giving Up? 16 Way to Help Entrepreneurs Stay Motivated 3 How to Quit Your Job That You Hate and Start Doing What You Love 4 8 Things to Remember When You Don’t Know What to Do with Your Life 5 14 Ways to Improve Work Performance and Get Ahead of Your Career

    Read Next

    Advertising
    Advertising

    Last Updated on October 18, 2018

    10 Key Characteristics of a Highly Successful Entrepreneur

    10 Key Characteristics of a Highly Successful Entrepreneur

    When it comes to starting your own business and pursuing your dream of becoming an entrepreneur, it can be advantageous to go all in and embrace the flexibility of finally quitting your day job.

    Keep in mind, though, that it takes a special kind of person to take the business world by storm: a person who has cultivated the key characteristics of entrepreneurial success.

    People with these characteristics are likely to succeed, whereas people without them have difficulty moving forward with even the most brilliant business ideas.

    These characteristics of an entrepreneur are so important that I’ve decided to cover all 10 of them in detail so that you can start your business with your best foot forward.

    1. Successful Entrepreneurs Practice Discipline

    Plenty of business experts claim that you can’t get anywhere as an entrepreneur without vision or creativity, but that’s simply not the truth. Instead, the one quality that no entrepreneur can be successful without is discipline.

    To build an idea into a business, you have to have the discipline to spend time slogging through the least fun parts of running a business (like the bookkeeping), rather than taking that time to do something fun.

    Andrew Carnegie, one of the most financially successful Americans of all time, grew up working dull and difficult jobs in factories. Despite going to bed hungry some nights, he continued doing his best work. He was eventually hired by a railroad company and continued to move up the ladder until starting his own successful businesses. Carnegie is a fine example of an entrepreneur dedicated to discipline and hard work. He truly earned his dreams of prosperity and success.

    When you’re the boss, there’s no one to keep you at work except yourself — and there’s no short-term consequences for skipping out early.

    Sure, if an entrepreneur plays hooky enough he knows that the business just won’t happen, but it’s very hard to convince someone that ‘just this once’ won’t hurt (and to keep ‘just this once’ from becoming a daily occurrence).

    Advertising

    2. Successful Entrepreneurs Keep Calm

    Things go wrong when you run your own business.

    Most entrepreneurs go through crises with their businesses — and more than a few wind up with outright failures on their hands. But when you’re responsible for a business, you have to be able to keep calm in any situation. Any other reaction — whether you lose your temper or get flustered — compounds the problem.

    Instead, a good entrepreneur must have the ability to keep his cool in an emergency or crisis. It may not make the problem easier to solve, but it certainly won’t make it harder.

    Honestly, losing your calm is a quick path to becoming the kind of person who gives up in the face of adversity. Instead giving in to frustration, remember classic entrepreneur Benjamin Franklin.

    Franklin kept his calm as he experimented and tweaked his inventions again and again in pursuit of success. He didn’t give up during his many failures – he chose to innovate. You can choose innovation, too.

    If an entrepreneur can handle failure without frustration or anger, s/he can move past it to find success.

    3. Successful Entrepreneurs Pay Attention to Details

    Restricting your attention to the big picture can be even more problematic than ‘sweating the small stuff.’

    As an entrepreneur, unless venture capital has magically dropped out of the sky, a small expense can be a killer. It’s attention to detail that can make a small business successful when it has competition and it’s attention to detail that can keep costs down.

    Attention to detail can be difficult to maintain — going over ledgers can be tedious even when you aren’t trying to pay close attention — but keeping your eye on a long-term vision is just asking for a problem to sneak in under a radar.

    Advertising

    After a business grows, an entrepreneur might be able to hire someone to worry about the details. In the beginning, though, only one person can take responsibility for the details.

    Skeptical about the importance of details? Look no further than Howard Schultz, who grew a small coffee shop called Starbucks into one of the most globally successful coffee businesses in the world through his extreme attention to detail.

    He is famous for taking all aspects of growing a business into account, paying attention not only to financially smart business decisions, but also focusing on socially responsible business decisions. Details can take you far.

    4. Successful Entrepreneurs Embrace Risks

    No entrepreneur has a sure thing, no matter how much money s/he stands to earn on a given product. Even if a product tests well, the market can change, the warehouse can burn down and a whole slew of other misfortune can befall a small business.

    It’s absolutely risky to run a business of your own and while you can get some insurance, it’s not like most investment options. Even worse, if something does go wrong, it’s the entrepreneur’s responsibility — no matter the actual cause. In order to deal with all of that without developing an ulcer, you have to have a good tolerance for risk.

    You don’t need to channel your inner frat boy and take on absolutely stupid risks, but you need to know just how much you can afford to risk — and get a good idea of how likely you are to lose it. If the numbers make you uncomfortable, the risk is too great.

    Embracing risks is essential for growth and additional success, as well. Walt Disney, for example, could have stayed comfortable with his advances in the film and animation industries, but decided to expand his brand with a new dream: a theme park that soared above the competition. Without taking this risk, the incredibly successful Disney theme park empire would never have come about.

    An entrepreneur has to be willing to accept pretty big risks, with some level of comfort.

    5. Successful Entrepreneurs are Balanced

    You can take any characteristic too far. There’s a point at which attention to detail can become obsession or calm can become unemotional response.

    Advertising

    As an entrepreneur, you have to be able to balance your characteristics, getting the most of them without going over the edge. But balance for an entrepreneur goes far beyond keeping your characteristics in check, though.

    Just as an entrepreneur doesn’t have a boss to keep them at work when necessary, they don’t have one to send them home when they’re done. If you are working for yourself, you have to decide how to balance your work and home life — and if you have a day job to add into the equation, balance just gets more complicated.

    Oprah Winfrey, one of the most successful and influential entrepreneurs out there, understands the importance of balance. Winfrey has a lot going on; she runs her own media kingdom, acts, produces films, publishes print, and more. In an interview with Fast Company,[1] she talks about her efforts to balance priorities and self care, saying that she must ask herself what is truly important in each limited day.

    You may or may not have as much on your plate as Oprah, but learning how to balance whatever you have going on in life will certainly help you farther along down the road as you learn to be a great entrepreneur.

    6. Successful Entrepreneurs are Passionate and Motivated

    In order to develop any of the above characteristics, you must have a foundation of passion. Staying disciplined day after day during the building of your business takes unrivaled motivation.

    Before you start any business, ask yourself if you can sustain true excitement about your idea during even the darkest days ahead of you. If the answer is yes, then good for you! Nurture your natural motivation by taking these action steps throughout your business journey:

    • Commit to making short and long-term goals. Check in with them often to stay on task.
    • Have a plan in place for the inevitable days when you feel discouraged. Make a list of things that will help keep you motivated and focused.
    • Share your ideas with trusted individuals who are just as excited as you are. They will help keep your enthusiasm rolling even when you are feeling down.

    By being prepared for apathetic days and holding fast to your authentic passion, you can actually enjoy your journey to success.

    7. Successful Entrepreneurs Adapt

    Remember this one word: flexibility. Seasoned entrepreneurs know that change is not only a part of life, but also a part of the business world. Expect change and choose to adapt.

    As a new entrepreneur, it will be tempting to cling to your original business plan with no exceptions, even if you notice it isn’t working. Good entrepreneurs know that it’s okay to make smart, informed changes in order to ensure efficiency.

    Advertising

    8. Successful Entrepreneurs are Marketing and Sales Experts

    No matter what kind of business you are starting, a knowledge of marketing and sales will save you many headaches. A passion for creating a beautiful handmade lifestyle product is not enough to run a successful lifestyle brand; it is critical that you understand key business principles in addition to your natural skills or great product line.

    Not sure how to start? Taking business courses is a great idea, but you can also easily brush up on sales and marketing through free online resources. Check out these 10 Sales Skills Everyone Should Master To Be Successful to begin now.

    9. Successful Entrepreneurs Have Strong Money Management

    Along with sales and marketing skills, money management is a very useful tool in the box of the entrepreneur. Understanding how to best manage your money can be the difference between early success and early failure in the business world.

    If money management isn’t your strongest skill, prepare to hire a financial expert to help you with any tricky business that comes up. Financial guidance and knowledge is never a bad idea.

    10. Successful Entrepreneurs Ask Questions and Continually Improve

    Pride is a natural human quality, but it’s important to humbly conduct some constructive criticism every now and again on both yourself as a leader and your new business as a whole.

    Assess how things are going and be willing to make positive changes if necessary. Here’re 15 ways to cultivate lifelong learning.

    If you are always improving, then how can you ultimately fail?

    The Bottom Line

    Let me remind you of one important fact: the qualities of an entrepreneur listed here are not exclusively available to some people and elusive to others.

    Although some people may have natural strengths and weaknesses, these qualities can be learned by anyone interested in taking up the entrepreneurial challenge. It might not be easy to change old habits, but it is absolutely possible to cultivate these characteristics in yourself.

    Whether you’re a business owner or an aspiring entrepreneur, with hard work, you can train yourself to develop the qualities that truly determine the entrepreneurial spirit and future success.

    Featured photo credit: Unsplash via unsplash.com

    Reference

    Read Next