How Cognitive Bias Affects Your Business - 0 views
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Human beings often act in irrational and unexpected ways wHen it comes to business decisions, money, and finance.
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Behavioral finance tries to explain the difference between what economic theory predicts people will do and what they actually do in the heat of the moment.
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There are two main types of biases that people commit causing them to deviate from rational decision-making: cognitive and emotional.
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Cognitive errors result from incomplete information or the inability to analyze the information that is available. These cognitive errors can be classified as either belief perseverance or processing errors
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Processing errors occur when an individual fails to manage and organize information properly, which can be due in part to the mental effort required to compute and analyze data.
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Base rate neglect is the opposite effect, whereby people put too little emphasis on the original information.
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Confirmation bias, where people seek information that affirms existing beliefs while discounting or discarding information that might contradict them.
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Anchoring and Adjustment happens when somebody fixates on a target number, such as the result of a calculation or valuation.
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HindsigHt bias occurs wHen people perceive actual outcomes as reasonable and expected, but only after tHe fact.
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Mental accounting is when people earmark certain funds for certain goals and keep them separate. When this happens, the risk and reward of projects undertaken to achieve these goals are not considered as an overall portfolio and the effect of one on another is ignored.
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Availability bias, or recency bias skews perceived future probabilities based on memorable past events
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Framing bias is when a person will process the same information differently depending on how it is presented and received.
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Cognitive errors in the way people process and analyze information can lead them to make irrational decisions which can negatively impact business or investing decisions
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. These information processing errors could have arisen to help primitive humans survive in a time before money or finance came into existence.