I came across an article recently that caught my attention. It talks about the different ways our brains can play tricks on us and how that can impact our decision-making.
It’s a fact that our lack of awareness of certain cognitive biases and fallacies can often be the deciding factor between success and failure. It’s really interesting to see how these biases can sneak up on us and sway our judgment without us even realizing it. That’s why it’s so important to be aware of these potential pitfalls and work to counteract them.
In this article, I am listing out 10 major fallacies you need to be aware of. If you are conscious of these behavioral traps, you can apply countermeasures and make more informed decisions, thereby increasing your chances of success.
1. Survivorship Bias
Survivorship bias is when people only consider those who succeeded and ignore those who failed.
This can result in inaccurate conclusions and poor decisions. For example, when studying successful entrepreneurs, if only the successful ones are considered, it may lead to the belief that certain traits guarantee success. But the unsuccessful entrepreneurs may have had the same traits.
This bias also occurs in finance when successful stocks or investments are picked while ignoring unsuccessful ones. This leads to an overestimation of potential returns and an underestimation of risk.
|It’s important to be aware of survivorship bias and take steps to avoid it. Gather information about both successful and unsuccessful cases and consider them equally.|
Recommended Read: Thinking, Fast and Slow by Daniel Kahneman is a good book that touches on the topic of survivorship bias.
2. Naive Realism
Naive realism is the idea that our understanding of the world is accurate and fair. This idea is mistaken because our own experiences and beliefs can influence how we see the world.
For example, people can have different opinions on the same topic because of their backgrounds and experiences. Like some may believe the earth is flat while others know it is round. Both see the same earth, but their views are shaped by what they have learned and experienced.
|The truth is that the world around us is more nuanced than it may seem on the surface. It is important to seek diverse perspectives and stay alert to our own biases to avoid the pitfalls of naive realism.|
Recommended Read: “Naive Realism and its Critics” by Richard Fumerton is a good book that provides a comprehensive overview of Naive Realism and its criticisms.
3. The Dunning-Kruger Effect
The Dunning-Kruger Effect is a psychological phenomenon in which people with low ability in a particular domain overestimate their ability.
In other words, they lack the skill to accurately assess their own competence. For instance, a novice in cooking, thinking their dishes are gourmet level.
|To steer clear of the Dunning-Kruger Effect, it is important to practice humility and acknowledge the limitations of one’s knowledge. Being open to constructive criticism also helps as long as an individual uses it as an opportunity to learn and improve.|
Recommended Read: “Unskilled and Unaware of It” by David Dunning and Justin Kruger is a seminal work on the Dunning-Kruger effect.
4. Loss Aversion
Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains.
The most prominent example comes from stock markets. Even seasoned investors, sometimes, fall prey to it. Even when a stock is unlikely to rebound, they refuse to sell it at a loss.
In his book “Thinking, Fast and Slow”, Daniel Kahneman argues that people react more strongly to losses than to equivalent gains, leading to an irrational preference for avoiding losses over acquiring gains.
|The best way to avoid loss aversion, says Kahneman, is by reframing decisions in terms of potential gains, rather than potential losses.|
Recommended Read: “Thinking, Fast and Slow” by Daniel Kahneman is a widely acclaimed book that covers the topic of loss aversion.
5. Confirmation Bias
Confirmation bias is when people look for information that supports their existing beliefs and ignore other perspectives.
A common example is only reading news that matches one’s political views. This idea has been discussed by authors like Nassim Nicholas Taleb and Karl Popper.
Taleb argues in his book “The Black Swan” that confirmation bias causes people to ignore evidence that contradicts their beliefs and reinforces false ideas, which can be dangerous.
|The best way to overcome Confirmation bias is by considering alternative explanations and hunting disconfirming evidence.|
Recommended Read: “Confirmation Bias: Inside Washington’s War Over the Supreme Court, from Scalia’s Death to Justice Kavanaugh” by Carl Hulse provides an in-depth examination of how confirmation bias affects the views and opinions of politicians and advocacy groups,
6. Fundamental Attribution Error
When you overemphasize personality factors for someone’s behavior while ignoring situational (external) factors, you walk into fundamental attribution bias.
For example, a driver cuts you off in traffic and you think they’re just a rude person, without considering they may be rushing to the hospital.
A junior colleague doesn’t show up in a planned meeting and you jump to conclusion that they’re unreliable. You don’t stop to consider they may have had a family emergency.
|The simplest way to steer clear of fundamental attribution error is by refraining from jumping to conclusions based on limited information.|
Recommended Read: “The Social Animal” by David Brooks is a popular book that provides a comprehensive examination of the psychological and social factors that contribute to the fundamental attribution error.
7. Sunk Cost Fallacy
When you are prone to the sunk cost fallacy, you might continue investing time and resources into a failing project simply because you already invested so much into it. This can cause us to make irrational decisions.
Consider a scenario where you continue a degree/career due to past investment even when your interest lies someplace else. Another instance could be staying in an unhappy relationship because of the time and effort invested.
|The best way to master the sunk costs is to identify them and be aware of them. List out the investments that can’t be recovered. Focus on making a decision based on future costs and benefits.|
8. Anchoring Fallacy
Anchoring fallacy is a cognitive bias in which a person relies too heavily on an initial piece of information (the “anchor”) when making subsequent judgments.
For example, negotiating the price of a car, where the initial asking price serves as an anchor. If you have ever been in such a situation, you’d know that all subsequent offers and counter-offers are based on that anchor price.
The influence of a starting salary offer in job negotiations is also a good case in point. The starting offer affects the perceived value of subsequent offers.
|Do you want to conquer anchoring bias? Start with questioning assumptions, always. Take time to reflect before making a decision. Don’t rely solely on the first piece of information you received.|
Recommended Read: “The Art of Thinking Clearly” by Rolf Dobelli is a popular book that provides a concise study of how anchoring can affect our decision-making and how to avoid it.
9. Bandwagon Effect
This is the phenomenon in which people do something because everyone seems to be doing so and that makes them think that it must be the correct behavior or action.
Notice how people follow fashion trends because everyone else is doing so.
Another common experience for those who invest in stocks is the temptation to invest in a rising, previously unknown stock just because everyone else seems to be investing. You don’t want to miss out on potential profits, so you invest, too.
|The best way to beat the bandwagon effect is to develop independent thinking. Cultivate your own thoughts, beliefs, and opinions and strive to make decisions based on your own values and judgment, not just those of the crowd.|
Recommended Read: “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely is a popular book that covers the topic of the bandwagon effect.
10. The Curse of Knowledge
The Curse of Knowledge Fallacy is a cognitive bias that occurs when someone, who has knowledge of a situation or subject, assumes that others have the same level of understanding or knowledge.
For example, a teacher assumes that all students have the same background knowledge. That leads him to impart a lecture that is too advanced for some students. Similarly, a seasoned manager may assume that trainees have the same level of knowledge, leading to a lack of clear direction.
|The best way to steer past the curse of knowledge fallacy is by asking questions and by clarifying your position. This helps build mutual understanding.|
Recommended Read: “Made to Stick: Why Some Ideas Survive and Others Die” by Chip Heath and Dan Heath shares practical strategies for overcoming the curse of knowledge and communicating effectively with others.
I hope that you enjoyed reading about the 10 fallacies you need to be aware of while making crucial decisions.
Remember, being aware of these fallacies is just the first step toward making better decisions. It is equally important to continually educate yourself and practice using sound reasoning in all aspects of your life.
To take your knowledge to the next level, consider signing up for a course on critical thinking or reading more about these fallacies. And as always, be vigilant and question everything – your own thoughts and beliefs, as well as those of others.
Thank you for reading and I look forward to your feedback in the comments section below.