In the 1970's, Daniel Kahneman and Amos Tversky introduced the idea of cognitive biases. These biases describe the systematic, but flawed, ways of thinking that often influence our judgements and decision-making. Biases occur for numerous and varied reasons, one of which is our brain's limited ability to process every piece of information simultaneously. To help make decision-making faster and easier, our brain then makes shortcuts (or heuristics), which in turn can lead to cognitive biases.
Cognitive biases are integral to understanding behavioral economics, affecting everything from how we buy, to how we invest, evaluate products, and judge people.
Nearly 200 cognitive biases currently exist, as shown is the following infographic:
Here is a breakdown of some of the most well-known cognitive biases:
Authority bias
The tendency to attribute greater accuracy to the opinion of an authority figure and be more influenced by that opinion.
Confirmation bias
The tendency to search for or interpret information that confirms one's own preconceptions or ideas.
Empathy gap
The tendency to underestimate the influence of our mental state on our behavior and make decisions that only satisfy our current emotion, feeling, or state.
Endowment effect
The tendency of people to demand more to give up an object than they would to acquire it.
Framing
The tendency to make a decision based on the way the information is initially presented, as opposed to solely on the facts themselves. The same facts presented differently can lead to people making different judgments or decisions.
Fundamental attribution error
The tendency to overemphasize personal factors, and underestimate situational ones, when mentally explaining other people's behavior.
Gambler's fallacy
The tendency to think that future probabilities are influenced by past events, when in reality they remain the same (e.g., series of roulette wheel spins)
Halo effect
The tendency for positive impressions (of a person, company, or product) in one area to positively influence one's opinion or feelings in other areas.
Hindsight bias
The tendency for our recollection of past information or events to be influenced by recently acquired knowledge.
Illusory correlation
The tendency to perceive a correlation between certain variables when no such correlation exists. This may occur because rare or novel events are more salient and therefore tend to capture attention.
In-group bias
The tendency to favor one's own group (including its members, characteristics, and products), especially in relation to other groups.
Loss aversion
The tendency to prefer avoiding losses to making equivalent gains.
Mere exposure effect
The tendency for people to develop a preference for things simply because they are familiar with them.
Optimism bias
The tendency to believe that our chances of experiencing negative events are lower, and our chances of experiencing positive events higher, than those of our peers.
Peak-end rule
To tendency to remember and heavily weigh intense positive or negative moments (the “peaks”) and the final moments (the “end”) of an experience.
Present bias
The tendency to give stronger weight to payoffs that are closer to the present when considering trade-offs between two future moments.
Priming
The tendency for the introduction of one stimulus to influence how people respond to a subsequent stimulus.
Saliency
The tendency to use noticeable or observable traits to make a judgment about a person or a situation.
Social Norms
The tendency to follow collectively held beliefs about what kind of behavior is appropriate in a given situation.
Status Quo bias
The tendency to prefer things to stay the same by doing nothing or by sticking with a decision made previously.