cognitive bias: DOES OUR Brain Play Against our Money?
We live in an era where (fortunally) talking about brain function, mental health, and even Ego is no longer considered too new age. Thanks to this, behavior economics, cognitive biases, and our consumption blind-spots became more and more known.
Scientific advances and the sensitive look of some researchers allowed “normal people" to understand what, rationally, seems beyond obvious: the biggest culprit for the wrong decisions they make is… Themselves. Especially when it comes to money.
There's hardly a thug pointing a gun at your head demanding you buy that blouse, right? Or a gang holding pandas hostage, demanding that you spend double what you had planned on that date to free the poor animals. Not to mention a terrorist threat that orders you not to invest in that bond, even though you've already concluded it is the best investment for your personal goals.
Why, then, do you keep acting against yourself?
When people started asking themselves this question, and countless articles, courses, and gurus emerged in an attempt to give them the answers, the term "self-sabotage" popped up endlessly.
Often, we curse our brain at the first opportunity. After all, isn't it the one who's hurting us so much? The villain of all our financial nightmares?
Before going down the cursing, tho, we must advise you no one wakes up planning to ruin their life in every possible area. That is not how brain works.
"You know what? Yes, today I will pass through that door and spend all my salary on unnecessary clothes. Then, when my bank account is empty, I will enter the overdraft, pay the minimum on my credit card bill and get a loan. So when I get into infinite debts, I'll dig even deeper, paying interests that never seem to end.
Finally, I will become old age penniless, depending on the government and my family, without accomplishing any of the dreams I had planned. Basically, I'm going to die without building anything worth in life.
Wow, that sounds like a GREAT idea! Where is that clothing store by the way?"
Ah, if it were that simple... At least it would be easier to avoid, right? If we were so honest about our choices, we might be able to stop ourselves before further damage.
However, this frank internal discussion doesn't happen because that's not how your brain thinks. No, it is not planning to destroy you every minute of the day. On the contrary it has developed, over millions of years, countless tools to help you survive - whatever it takes.
Unfortunately, it doesn't always work out. The brain is also wrong. And what makes perfect sense rationally (not buying that blouse, for example) doesn't make sense emotionally ("aff, it's just a blouse! What do I have a credit card for?"). And guess which side wins?
When it comes to money, emotions count more than rationality
What arises from the “emotions vs. rationality” dispute is the so-called cognitive dissonance. Thanks to it, whenever two or more of our cognitions (language, beliefs, and learning, among others) come into conflict, we experience suffering. To rescue you, the brain creates little stories that make our inconsistencies apparently more coherent… And that's how our paralogisms are born!
To our salvation, since the mid-20th century, a field of study known as Behavioral Economics has emerged. In it, scientists study how psychology influences our financial behavior - not only when it comes to expenses but also earnings and investments.
Big names, like Daniel Kahneman (Nobel Economics winner) and Amos Tversky, became famous precisely for contributing to Behavioral Economics. And one of they most incredible findings concerns a psychological phenomenon known as cognitive bias.
What are cognitive biases? How they affect our money relationship?
By definition, a cognitive bias is a logical error. It occurs when our brain is processing informations linked to cognitions - such as learning, memory, and language.
Think with us: at every moment, you are being bombarded by all your senses.
No matter how focused you are on reading this article, the other sounds, colors, smells, textures are still there, all around you. So, at every moment you are cataloging information that comes to you ("hmmm, does that smell like pizza?"), drawing conclusions ("the taste must be delicious") and reacting ("I'll go get a piece when I finish my reading!").
When an error occurs in any of these three phases, the space for the formation of a cognitive bias opens up.
And there are two things you need to keep in mind going forward to truly understand what we're talking about:
1. Your brain's biggest goal is your survival. Period.
2. Biases have a strong logical appearance - at first glance, they seem to make perfect sense.
When the brain chooses to buy that $50.00 snack instead of saving that amount for the future, it really believes that this attitude will ensure that you stay alive - or at least increases your chances. It's not bad. There's no "I'm going to ruin your life, MUAHAHA" dialogue.
Sometimes you realize that your actions and what your rationality says don't agree. What many call a crisis of conscience, in Psychology it is all our old enemy Cognitive Dissonance working. Basically, you go into the pain and your brain (here it comes again), ready to save you, clings to the first story that brings coherence to what you've done.
"I only bought it because I was hungry. I don't work so hard to be hungry, do I?", says its dramatic side, which comforts you when you realize that you wasted $50.00.
It is in this complacency game, trying to understand the world, lies told to ourselves, and a lot of emotional pain that the cognitive bias is established.
How to mitigate cognitive biases?
To beat cognitive biases, which means stop taking wrong conclusions around money and see our reality as clear as possible, there is no other way. Its necessary to know the said-whose in depth.
In three steps: you have to keep reading about this subject, establishing a connection with your life, and changing your attitude. There is no shortcut.
With the first two steps, let us help you. After all, our main concern in the articles we wrote in this series was to bring quality information that could be "translated" into your daily life.
What does Post-Purchase Rationalization have to do with the last bill you paid? What does Hyperbolic Discounting say about your reluctance to prepare for the future? How does the Bandwagon Effect distort your view of yourself and your abilities?
All the answers are available to you now!
Oh, but first we need to make a caveat. While it would be much easier to call every cognitive bias Bias A, Bias B, Bias C, and so on, this is not how the naming of this psychological phenomenon has progressed.
Therefore, it is not enough to open the letter V of our Financial Dictionary and read the articles you find. You'll learn a lot, it's true, but you'll leave out a lot of cool (and useful) stuff.
So don't let a term go unnoticed just because it doesn't even have "Bias" in its name. Sometimes it is in an Illusion, an Effect, or a Heuristic (to name the basics) that the solution to your problem lies. Don't miss the chance to get to know more of your brain and delve deeper!
The Internet's Longest List of Cognitive Biases
When searching on Google, you may find some lists with different types of cognitive biases.
However, they all have the same problem: they don't explain what these terms really mean.
And worse, they do not even show the relation between cognitive biases and your money in your daily life.
With that in mind, we've included as many articles about cognitive biases as possible in our Financial Glossary.
All of them have an incredible wealth of details, explaining the cause and consequences of each one of them.
No kidding, it's the largest list of complete articles on cognitive biases on the entire internet.
If you are as fascinated by the topic of cognitive biases as we are, to the point that you want to study it to understand yourself and make better choices in the future, here is our particular summary: