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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.

    More by this author

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    Last Updated on March 29, 2021

    5 Types of Horrible Bosses and How to Beat Them All

    5 Types of Horrible Bosses and How to Beat Them All

    When I left university I took a job immediately, I had been lucky as I had spent a year earning almost nothing as an intern so I was offered a role. On my first day I found that I had not been allocated a desk, there was no one to greet me so I was left for some hours ignored. I happened to snipe about this to another employee at the coffee machine two things happened. The first was that the person I had complained to was my new manager’s wife, and the second was, in his own words, ‘that he would come down on me like a ton of bricks if I crossed him…’

    What a great start to a job! I had moved to a new city, and had been at work for less than a morning when I had my first run in with the first style of bad manager. I didn’t stay long enough to find out what Mr Agressive would do next. Bad managers are a major issue. Research from Approved Index shows that more than four in ten employees (42%) state that they have previously quit a job because of a bad manager.

    The Dream Type Of Manager

    My best manager was a total opposite. A man who had been the head of the UK tax system and was working his retirement running a company I was a very junior and green employee for. I made a stupid mistake, one which cost a lot of time and money and I felt I was going to be sacked without doubt.

    I was nervous, beating myself up about what I had done, what would happen. At the end of the day I was called to his office, he had made me wait and I had spent that day talking to other employees, trying to understand where I had gone wrong. It had been a simple mistyped line of code which sent a massive print job out totally wrong. I learn how I should have done it and I fretted.

    My boss asked me to step into his office, he asked me to sit down. “Do you know what you did?” I babbled, yes, I had been stupid, I had not double-checked or asked for advice when I was doing something I had not really understood. It was totally my fault. He paused. “Will you do that again?” Of course I told him I would not, I would always double check, ask for help and not try to be so clever when I was not!

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    “Okay…”

    That was it. I paused and asked, should I clear my desk. He smiled. “You have learnt a valuable lesson, I can be sure that you will never make a mistake like that again. Why would I want to get rid of an employee who knows that?”

    I stayed with that company for many years, the way I was treated was a real object lesson in good management. Sadly, far too many poor managers exist out there.

    The Complete Catalogue of Bad Managers

    The Bully

    My first boss fitted into the classic bully class. This is so often the ‘old school’ management by power style. I encountered this style again in the retail sector where one manager felt the only way to get the best from staff was to bawl and yell.

    However, like so many bullies you will often find that this can be someone who either knows no better or is under stress and they are themselves running scared of the situation they have found themselves in.

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    The Invisible Boss

    This can either present itself as management from afar (usually the golf course or ‘important meetings) or just a boss who is too busy being important to deal with their staff.

    It can feel refreshing as you will often have almost total freedom with your manager taking little or no interest in your activities, however you will soon find that you also lack the support that a good manager will provide. Without direction you may feel you are doing well just to find that you are not delivering against expectations you were not told about and suddenly it is all your fault.

    The Micro Manager

    The frustration of having a manager who feels the need to be involved in everything you do. The polar opposite to the Invisible Boss you will feel that there is no trust in your work as they will want to meddle in everything you do.

    Dealing with the micro-manager can be difficult. Often their management style comes from their own insecurity. You can try confronting them, tell them that you can do your job however in many cases this will not succeed and can in fact make things worse.

    The Over Promoted Boss

    The Over promoted boss categorises someone who has no idea. They have found themselves in a management position through service, family or some corporate mystery. They are people who are not only highly unqualified to be managers they will generally be unable to do even your job.

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    You can find yourself persistently frustrated by the situation you are in, however it can seem impossible to get out without handing over your resignation.

    The Credit Stealer

    The credit stealer is the boss who will never publically acknowledge the work you do. You will put in the extra hours working on a project and you know that, in the ‘big meeting’ it will be your credit stealing boss who will take all of the credit!

    Again it is demoralising, you see all of the credit for your labour being stolen and this can often lead to good employees looking for new careers.

    3 Essential Ways to Work (Cope) with Bad Managers

    Whatever type of bad boss you have there are certain things that you can do to ensure that you get the recognition and protection you require to not only remain sane but to also build your career.

    1. Keep evidence

    Whether it is incidents with the bully or examples of projects you have completed with the credit stealer you will always be well served to keep notes and supporting evidence for projects you are working on.

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    Buy your own notebook and ensure that you are always making notes, it becomes a habit and a very useful one as you have a constant reminder as well as somewhere to explore ideas.

    Importantly, if you do have to go to HR or stand-up for yourself you will have clear records! Also, don’t always trust that corporate servers or emails will always be available or not tampered with. Keep your own content.

    2. Hold regular meetings

    Ensure that you make time for regular meetings with your boss. This is especially useful for the over-promoted or the invisible boss to allow you to ‘manage upwards’. Take charge where you can to set your objectives and use these meetings to set clear objectives and document the status of your work.

    3. Stand your ground, but be ready to jump…

    Remember that you don’t have to put up with poor management. If you have issues you should face them with your boss, maybe they do not know that they are coming across in a bad way.

    However, be ready to recognise if the situation is not going to change. If that is the case, keep your head down and get working on polishing your CV! If it isn’t working, there will be something better out there for you!

    Good luck!

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