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5 Cognitive Biases of Money

A cognitive bias is a cognitive inaccuracy that occurs in a person's reasoning when making a decision that is influenced by personal views. Cognitive errors are important in behavioural finance theory and are investigated by both investors and academics.

10 Cognitive Biases in Your Brain That Are Costing You Money

  1. Anchoring Effect - The anchoring effect is a cognitive bias that reflects the frequent human inclination to make decisions based on the first piece of information provided (the "anchor").

For example, 

  • The initial cost offered for a used car establishes the norm for the rest of the talks, so prices lower than the original price appear more acceptable even though they are still greater than the car's true value. 

  • If you see a T-shirt that costs $1,200 and then another that costs $100, you're more likely to dismiss the second garment as cheap. If you only saw the second shirt, which costs $100, you would probably not consider it inexpensive. 

  1. Bandwagon Effect - The bandwagon effect is the tendency for people to embrace a particular behaviour, style, or attitude simply because everyone else is. The more people who adopt a specific trend, the more likely it is that additional people will follow suit. The bandwagon effect is one of several cognitive biases or errors in thinking that influence people's judgements and decisions.

Cognitive biases are frequently intended to help people think and reason faster, yet they frequently add errors and miscalculations.

The Bandwagon Effect is demonstrated in the following examples:

 Elections: People are more likely to vote for the candidate they believe will win.

Fashion: Many people start wearing a certain type of clothing after seeing others do so.

 

  1. Endowment Effect - The endowment effect is an emotional bias that encourages people to appreciate an owned thing more than its market value, frequently erroneously. According to research, the two main psychological causes for the endowment effect are "ownership" and "loss aversion."

Items with emotional or symbolic importance to the individual can exhibit the endowment effect.

Car showrooms, for example, provide the opportunity to test drive a vehicle. According to data, 88.6 per cent of prospective customers choose this choice and go for a test drive. When prospective purchasers take the car for a test drive, the endowment effect kicks in. They act as if they are the true owners of the car, and as a result, they are likely to pay more money for it because of their emotional connection.

 

  1. Halo effect - The halo effect is a sort of cognitive bias in which our general opinion of someone influences how we feel and think about them. In essence, your overall perception of a person ("He is kind!") influences your assessments of that person's individual characteristics ("He is also brilliant!"). People's perceptions of a single trait can influence how they perceive other aspects of that individual.

Our overall perception of celebrities is a terrific illustration of the halo effect in action. People regard them as bright, kind, and amusing because they are gorgeous, successful, and often pleasant.

As a result, the halo effect is also known as the "physical attractiveness stereotype" and the "what is beautiful is also good" idea.

 

  1. Mere Exposure Effect 

 

Continuous exposure to a stimulus (e.g., a name, voice, or picture) leads to increased preference or appreciation of that stimulus. In other terms, it is a person's persistent exposure to a subject or event. The effect is stronger if the person has not previously established a negative attitude toward the stimulus or if the person is oblivious of the stimulus presentation.

For instance,

i. Falling in Love - The Mere Exposure Effect describes an important component that influences human attraction. According to a Pew (2006) survey, 38% of married people or persons in long-term relationships meet at the same job, school, sports centre, or church.

ii. How Hit Songs Are Made - "People listen to Top 40 because they want to hear their favourite songs or songs that sound like their favourite songs," says Charles Duhigg. They are offended when something different comes on. They don't want anything new."

iii. billboards and pamphlets

iv. Making Use of Color Psychology When Creating Brand Logos and Adverts

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