Cognitive Biases & Noise
Cognitive biases are systematic errors of judgment that lead us towards a predictably "irrational" behaviour. They arise due to the mechanisms at play in our thinking processes.
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The interaction of System 1 and System 2 as well as the concepts we use are causing these unconscious traps.
In other words, our unconscious use of heuristics (mental shortcuts) makes us very efficient in 99% of the situations but this leads us also to cognitive traps. There are a large number of cognitive biases and most of them still have to be named. The complexity of cognitive biases lies in the fact that they do not come to us categorized and one-by-one...
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Due to our environment, the mechanisms at play in our brain and our perceptions there is literally a dozen of biases at play simultanously, reinforcing themselves.
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The 8 biases briefly described here are drawn from the book of Daniel Kahneman : "Thinking, fast and slow".
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Representativeness bias
Ignoring facts & figures from statistic reasoning
Description
Example
This cognitive bias lead us to neglect statistical reasoning when we are confronted with situations where we attach ourselves to some details and thus form a cliché of the situation. We tend to rely more on our mental models (representations / simplifications) than on statistic reasoning. The representativeness bias has 3 major declinations. This bias is present in multiple decision-making processes within a business environment where managers have to assess the occurrence of specific situations or reliability of specific partners
Jim is tall and very muscular. He’s also very competitive. He drives an expensive car and wears
rather flashy clothing. Which is more probable?
A. Jim is a professional athlete.
B. Jim has a more common job like a lawyer or financial analyst.
The intuitive answer to this question is A, however the correct answer is B. We neglect the statistical reasoning of base rates due to our mental “representation” of Jim. Due to some hints in
the description we stereotyped Jim. However, the reality is different, there are far more lawyers and financial analysts compared to professional athletes, consequently much more probability that Jim is a lawyer or financial analyst.
Substitution bias
Give an answer to an easier question instead
Description
Example
This cognitive bias leads us to replace a complex question (target question) with an easier question (heuristic question) where an intuitive answer immediately arises. This mechanism happens fast and unconsciously and is thus difficult to detect. This bias is a bias in itself but simultaneously can lead to other biases such as overconfidence, the availability bias or the confirmation bias.
D. Kahneman describes this mechanism as a “mental shotgun” that makes it easy to generate quick answers to complex questions without having to activate the decision-makers’ lazy and effortful System
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Target question: How much would I be willing to pay to save endangered species?
Heuristic question: How much emotion do I feel when I imagine dying dolphins?
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There is a gap between the outcomes of both answers. The target question requires an answer expressed in dollars and the heuristic proposes an answer expressed in a feeling. Our System 1 has the powerful ability to make the appropriate match between both answers without the decision-maker noticing it and without the effortful activation of System 2
Confirmation bias
Seek information that confirms existing beliefs
Description
Example
This bias consists of our tendency to favor information that is consistent with our existing beliefs. Consequently, this bias will lead us to search for information that will confirm our existing and unconscious beliefs. According to D.T. Gilbert (1991), whenever we are confronted with a statement, the starting point of understanding the statement is to believe in it. This is the root cause of the confirmation bias.
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D. Kahneman described this situation as our automatic System 1 trying to match the statement with our beliefs / associations. Moreover, it is effortful for our lazy System 2 to unbelieve something. The cognitive ease has to be broken which is not our favorite thing to do (just try 33 X 79 without your smartphone to measure the pain related to breaking the cognitive ease)
Is Tom friendly?
Our brain will unconsciously search for moments where Tom was friendly
Is Tom unfriendly?
Our brain will unconsciously search for moments where Tom was unfriendly
Framing biases
The way information is framed impacts our judgement
Description
Example
We tend to assess information that is presented in different ways differently and this consequently affects our decision-making. The format in which a question or problematic is presented influences our way to judge the situation.
The sentences might substantially be equal to each other, however we assess the information differently.
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This biases lead D. Kahneman and A. Tversky to develop the prospect theory in which they uncover that humans dislike losing more than they like winning. Consequently, if a situation is framed in different way (change the reference point) your behavior towards risk could change.
Choose between getting $900 for sure or a 90 percent chance of getting $1,000.
A.Getting $900
B. 90 percent chance of getting $1,000
Choose between losing $900 for sure or a 90 percent chance of losing $1,000.
A. Losing $900
B. 90 percent chance of losing $1,000
In this example people tend to answer differently to both similar situations.
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The questions might substantially be equal to each other, however we assess the information differently.
Halo Effect
Exagerate emotional coherence
Description
Example
The Halo-effect or exaggerated emotional coherence is a powerful bias when we judge people or situations. Due to our both mechanisms of associative machine and coherence seeking we tend to look at situations or people in a simpler and more coherent way than it is in reality. Because
in our mind all is categorized and simplified, our brain rejects complexity and non-coherence. Basically, “Good people do good things and bad people are all bad.” The Halo effect can be positive or negative.
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This bias coupled with the confirmation bias can be very impactful.
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This bias emphasizes the importance of the first impression that we cannot control. The sequence in which we meet people or study a situation matters and we are most of the time unable to control this sequence
Availability bias
Impact of the ease with which memories come to mind
Description
Example
D. Kahneman and A. Tversky (1973) defined the availability bias by: “the process of judging frequency by the ease with which instances come to mind”.
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The psychologists describe that the mechanisms at work behind this bias are the interactions between our two systems. The laziness of our effortful System 2, and our desire to remain in a cognitive ease.
The ease with which memories comes back is not a reliable indicator.
The availability bias can affect our perception of situations, people or the perception of us. This bias is one of the sources of overconfidence.
Norbert S. et al (1991) studied the impact of the ease with which participants could retrieve assertive situations on how assertive these people rated themselves.
They asked 2 groups of participants to retrieve 6 or 12 situations were they remember having been assertive. Both groups had to rate themselves on assertiveness after they had completed the task. The outcomes of this experiment are significant: The self-ratings were influenced by the ease with which the examples came to mind and not by the number of examples that were asked to find. So comparatively people who found 6 examples rapidly rated themselves more assertive than people who found 6 examples rapidly and then struggled for a while to find other examples to reach the required 12 examples.
Anchoring bias
Benchmark effect of numbers
Description
Example
Any number that is presented has a benchmark effect on people even if this number is irrelevant or absurd.
There are 2 kinds of anchoring effects:
The first kind occurs in our Automatic and fast System 1. Our System 1 will be primed by a number and unconsciously, in its quest for coherence will try to make sense of the number that was presented to us.
The second kind of anchoring effect occurs due to a process of our System 2. Our System 2 notices a number, and from this number it will adjust the number to his belief of the outcome. It will go trough a deliberate adjustment process until our system falls into the “uncertainty zone”.
“Would you be willing to pay $5 annually to save the seabirds?
How much would you be willing to contribute? ___
“Would you be willing to pay $400 annually to save the seabirds? How much would you be willing to contribute? ___
In these cases the anchors are $5 and $400. The average contribution for the participants with the $5 anchor was $20.
The average contribution for the participants with the $400 anchors was $143!
Overconfidence bias
Tendency to be overly confident about our opinions
Description
Example
D. Kahneman (2011) describes overconfidence as: “Our excessive confidence in what we believe we know, and our apparent inability to acknowledge the full extent of our ignorance and the uncertainty of theworld we live in. We are prone to overestimate how much we understand about the world and underestimate the role of chance in
events.”
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Once more, the various mechanisms of our mind coupled with other cognitive biases namely the availability bias and the hindsight bias can strongly influence how we evaluate ourselves and others.
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The economists U. Malmendier and G. Tate (2009) describe that CEO’s who were praised by business awards for their achievements subsequently underperform.