Are You Being Tricked (By Your Own Mind)?

Here is a quick test. Which would you prefer to receive: $150 today or $180 next month? When this experiment is run most people would rather take the smaller amount now than wait one month. But consider this fact, if you were able to invest $150 now at a 20% rate of return, you would have $180 the following month. In the world of investing, a 20% return is massive. Yet for some reason our minds discount future money, even if it is worth more. This is a prime example of a cognitive bias.

In The Atlantic a while back, Ben Yagoda wrote an article diving into the many cognitive biases that affect everyone. He notes that there are over 185 different biases listed on the Wikipedia page. While not all are important, some affect us more frequently.

The gambler’s fallacy makes us absolutely certain that, if a coin has landed heads up five times in a row, it’s more likely to land tails up the sixth time. In fact, the odds are still 50-50. Optimism bias leads us to consistently underestimate the costs and the duration of basically every project we undertake. Availability bias makes us think that, say, traveling by plane is more dangerous than traveling by car. (Images of plane crashes are more vivid and dramatic in our memory and imagination, and hence more available to our consciousness.)

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In the article, Yagoda’s explores the question of whether it is possible to educate ourselves to avoid cogitative biases or if we are doomed to always fall for them. To learn his findings, please read the full article.

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