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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.)

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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.”

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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.

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    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.

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    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.

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    Last Updated on May 20, 2020

    What Are Analytical Skills (And How to Strengthen Them For Success)

    What Are Analytical Skills (And How to Strengthen Them For Success)

    Everybody makes bad decisions. Some people, however, are more capable of making better decisions that inch them closer to success.

    These individuals are not ruled by emotions, desires, or hunches. Rather, they depend on their analytical skills to overcome challenges regardless of urgency or complexity.

    What Are Analytical Skills?

    According to Richards J. Heuer Jr., a former veteran of the CIA,[1]

    “Thinking analytically is a skill like carpentry or driving a car. It can be taught, it can be learned, and it can improve with practice. But unlike other skills, it is not learned by sitting in a classroom and being told how to do it. Analysts learn by doing.”

    Analytical skills can be considered as one of the critical life skills that are not taught in schools. It comprises of visualization, critical thinking, and abilities for gathering and processing information.

    Here’s a closer look at some of these abilities:

    Visualization

    Also tied to a person’s creativity, visualization is the ability to predict the possible outcomes of strategies and actions. In a professional setting, visualization involves the analysis of data – often through illustrations like charts, graphs, and detailed lists.

    Critical Thinking

    Simply put, a person’s ability to think critically can be measured by his or her consistency in creating reasonable decisions. It pertains to the ability to evaluate information, siphon what’s useful, and draw conclusions without being swayed by emotions.

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    As a critical thinker, you’ll find yourself challenging assertions and finding loopholes in proposed solutions.

    Computing

    Whether you like it or not, you need to be comfortable with numbers if you want to sharpen your analytical skills. Bear in mind that computing encompasses other skills like cost analysis, budgeting, and performing general calculations.

    In business, you need to use computations when weighing the risks and benefits of any given strategy.

    Problem-Solving

    Remember that analytical skills are used not just to understand problems, but also to develop the most suitable course or courses of action. This relates to your goal-setting skills, which involve breaking down and prioritizing between objectives.

    Resource Management

    Lastly, analytical skills involve some degree of resource management depending on the task at hand.

    For example, professionals with a tight schedule must know how to effectively manage their own time – also known as one of the most important resources in the world.

    Business leaders, on the other hand, must know how to manage company resources, including cash and manpower. Take note that the definition of analytical skills may change to match the requirements of a specific situation.

    For example, upon hiring a web developer, analytical skills may refer to the ability to determine the needs of online users, understand web analytics for optimization, and identify visual elements that can match a company’s brand.

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    The skillset above, however, should be applicable in most if not all scenarios.

    Develop Your Analytical Skills for More Growth Opportunities

    There’s no question that the right decisions lead to positive results. It doesn’t matter if you’re running a business or simply trying to climb the corporate ladder. By training your analytical skills, you position yourself for more growth opportunities while staying away from negligible actions you will regret.

    For example, you plan to launch a new startup in your local community – but struggle to decide the niche you want to enter. Since you’ve been a technophile your whole life, part of you desires to invest in a gadget store. If you’re passionate about your business, success will come – right?

    If you have sharp analytical skills, you begin to see your plans in whole new dimensions.

    What are the possible outcomes of this venture? Does the local market have a need for a new gadget store? How much do I need to get started – and how much should I sell to make a profit?

    Depending on your findings, you can determine the feasibility of your business idea without letting your emotions get in the way.

    6 Ways to Strengthen Your Analytical Skills

    There are several approaches when it comes to developing an individual’s analytical skills. For instance, psychologists agree that reading fantasy stories as a child can help sharpen critical thinking.[2]

    Research also suggests that undergoing traditional education has a positive effect on a person’s IQ and analytical skills.[3]

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    But as an adult, such opportunities to hone your analytical skills no longer apply. That’s why you need to devise a more deliberate, active approach yourself.

    Below are a few strategies to get you started:

    1. Ideate Business Ideas

    Developing a profitable business idea, whether you pursue them or not, involves numerous challenges. You need a ton of research, computations, and problem-solving to create a tangible business plan.

    You can organize your ideas with a note-taking tool like Microsoft OneNote or Evernote. Doing so will allow you to delve deeper into your analysis, organize your findings, and stay focused on roadblocks as well as how to solve them.

    2. Leverage Analytical Tools

    Aside from note-taking tools, you can also leverage other software that can help with analytical tasks. A money management app like Mint, for example, makes it easy to track your spending habits as well as manage your budget with visual tools. When it comes to prioritizing goals, you can use simple task management apps like Trello or Wunderlist.

    3. Have a Personal Learning Library

    Thanks to the internet, there’s a colossal amount of resources you can utilize to learn new skills, expand your vocabulary, and train your visualization muscles.

    Social media networks like SlideShare and YouTube, for example, offer mountains of tutorials you can access to your heart’s content.

    For a personalized learning library, you can download Instagram videos or GIFs from educational accounts like NASA Goddard and the American Mathematical Society. But if you prefer specific, technical skills, then a good place to start would be online learning platforms like Coursera, edX, and Alison.

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    4. Participate in Online Communities

    The internet is a great place to share experiences, opinions, and sometimes intellectual discussions with like-minded individuals. Reddit, for example, has a place or “subreddit” dedicated for every topic imaginable – from technology to entrepreneurship.

    For structured debates, you can head to websites like Debate.org and let other users choose the winner via votes.

    5. Seek Mental Stimulation

    To keep your mind sharp, make it a habit to engage in mentally stimulating activities, such as chess, puzzles, and brain training apps. A great resource would be Lumosity, which contains dozens of cognitive games designed by teams of scientists and game designers.

    6. Keep a Personal Journal

    Finally, keeping a personal journal allows you to take a second look at everything that happened in your day.

    Remember that writing about learning experiences lets you focus on the lesson rather than the emotion. It will help you analyze how you made your decisions, why you came to certain conclusions, and what you can do to improve in the future.

    Here’s How to Create a Habit of Writing in a Journal.

    Bottom Line

    As an adult, you are required to face a myriad of challenges on a daily basis. Work, school, business, relationships – the list goes on when it comes to the sources of life’s problems. With analytical skills, you can confront and overcome any obstacle standing between you and your goals.

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    Featured photo credit: Campaign Creators via unsplash.com

    Reference

    [1] M. S. Ramaiah University of Applied Sciences: Analytical Thinking?
    [2] KD Novelties: Why You Should Read Classic Tales to Your Children
    [3] Economic Inquiry: The Effect of Education on Cognitive Ability

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