List of Cognitive Biases You Need To Know About
“Worldly wisdom is mostly very, very simple. And what I’m urging on you is not that hard to do if you have the will to plow through and do it. And the rewards are awesome - absolutely awesome.”
Reading Time: 9-Minutes
Charlie Munger, Vice-Chairman of Berkshire Hathaway and all-around brilliant thinker, wrote a paper called “The Psychology of Human Misjudgment” - printed in Peter D. Kaufman’s Third Edition of Poor Charlie’s Almanack: The Wit and Wisdom of Charlies T. Munger.
That paper is the inspiration behind this list of 25 cognitive biases. I highly recommend you read it in its entirety.
Here’s the list of cognitive biases:
You are controlled by incentives: Incentive-Caused Bias
The influence of punishments and rewards are incredibly important when trying to understand why people do both the reasonable and crazy, non-sensical things that they do.
As Charlie says, “show me the incentive and I will show you the outcome.”
As a leader, always look to incentives first as a way to boost productivity from others and from yourself. And if someone is pushing you on a specific idea or approach that just doesn’t make any logical sense, try to understand what exactly is in it for them.
2. You just want to be liked: Liking / Loving Tendency
So it goes with liking / loving bias. Not only do I want to be loved by my wife, and our dog, and my friends & family, but I want to be loved by complete strangers as well! By the house-cleaner, by the gardener, by the random-ass stranger grabbing kohlrabi beside me at the farmer’s market.
I want all the love - and that’s just human nature. And, when you like or love someone else, you love the things associated with them, while turning a blind eye to their faults.
Have you ever wondered why your boss loves your colleague’s (lesser) idea more than yours? Maybe your boss just likes your colleague more than you… I know, the truth hurts.
3. You love to hate: Disliking / Hating Tendency
I hate the Toronto Maple Leafs. I hate players who play for the Toronto Maple Leafs. I hate almond milk. I hate people who drink almond milk.
You are born to love, and you are born to hate. This tendency also causes you to ignore the good qualities of the person you don’t like (Austin Mathews is an “OK” hockey player) and to hate the things associated with them.
When it comes down to it, don’t let your dislike of someone stop you from making the best possible decision.
4. You make decisions quickly: Doubt-Avoidance Tendency
The brain is programmed to remove doubt as quickly as it can by coming to a decision. Our ancestors didn’t have time to contemplate whether it really was a tiger coming their way - those who did take time to think about it haven’t passed on their genes (you know, cause they were eaten by the tiger).
To make good decisions, delay them.
5. You like your decision better the moment after you’ve made it: Inconsistency-Avoidance Tendency
Once I make the decision that I like a specific stock, it’s very hard to change my mind. I like the decision better after I’ve made it, and I’m reluctant to change it, even if the story of the stock has changed for the worse.
Do you see the problem? Not only do we jump to the wrong conclusions quickly (see #4 above), we are very reluctant to change our minds. That is a recipe for disaster.
Learn to regularly destroy your strongest convictions if you want to succeed in an exceedingly complex world.
6. You are a curious creature: Curiosity Tendency
Humans are curious. We like to know things for the sake of knowing things. That’s how you found this website and why you are reading this article. Be curious and keep digging.
7. You expect the world to be fair and just: Kantian Fairness Tendency
When I’m driving on Los Angeles freeways (save me please) I try to let other drivers in front of me as much as I can. I do this if the situation were reversed, I expect that others would do the same for me.
And so goes our expectation that the world around us is generally fair. If we see other humans blatantly disregarding social fairness, like cutting in line at the grocery store, we fly off the handle.
Remember that this is a social construct, and it is only the expectation that the world is fair that generally keeps it that way.
8. You have a tendency to be jealous and envious: Envy/Jealousy Tendency
Jealousy and envy can be major driving forces behind someone’s actions. Rare is the person who is whole-heartedly happy for a friend’s success and can celebrate without a tinge of these emotions.
But, I learned a great trick from Naval Ravikant on how to get rid of jealousy forever. All you have to do is imagine swapping your life entirely with the person you are jealous of. Read more here.
9. You expect to get back what you give: Reciprocation Tendency
If you give a friend a nice pair of Seinfeld socks for her birthday, you subconsciously (and sometimes consciously) expect that gesture to be reciprocated when your birthday comes around. And if it isn’t, you can bet you’re going to make a stink about it, because that’s what George Costanza would do.
We expect to get back what we give. At the same time, humans don’t generally ignore a perceived injustice, and often over-react when such a situation arises. The solution? Learn to delay your reaction. I call it the “sacred pause” - a moment to reset and recalibrate your emotions before reciprocating.
10. You are powerfully influenced by associations: Influence-from-Mere-Association Tendency
Have you ever seen one of those Carl’s Jr. commercials where a scantily clad woman eats a burger?
The audience associates the burger with the beautiful woman and then wants the burger.
Influence-by-association bias is also why you may have better luck selling a product by raising its price. We associate high prices with quality products.
It’s why someone’s past success could lead you to hire the wrong person, and why you tend to dislike someone who delivers you bad news.
The power of association is the reason why commercials and product placement advertisements work in the first place.
Learn to recognize just how influenced you are by it.
11. You change the facts to avoid pain: Simple, Pain-Avoiding Psychological Denial
It’s always easier to change the facts and skirt responsibility than to accept that we made a mistake. It’s an assault on our sense of self when we are forced to admit failure. Got a parking ticket? The meter didn’t work! Sent a sensitive email to the wrong recipient? They have the same first name! Smoking again at a party? You’re just a social smoker! What’s the solution? Learn to face the worst of life head-on, and always ask for the bad news first.
12. You think you are better than average: Excessive Self-Regard Tendency
We all think of ourselves as above average. It’s why we like people similar to us, and why we sometimes hire the wrong person by overweighing a positive face-to-face impression vs. the applicant’s past record. And the power of association ensures that we think of the things we own as more valuable once we own them and that our decisions are better once we’ve made them. The solution? Force yourself to be more objective when thinking about yourself, your work, and your family & friends.
13. You are overly optimistic: Overoptimism Tendency
“Nothing is easier than self-deceit. For what every man wishes, that he also believes to be true,” says the greek orator, Demosthenes. We all tend to be optimistic about the prospects for things that will benefit us. From business prospects to lottery tickets, we are always hoping for the best. The antidote? Learn to think in simple probability math, and attempt to objectively assign probabilities to outcomes. If all the things you want to happen stand at 99 percent, you’re likely doing it wrong.
14. You suffer more from a loss than you enjoy from a proportionate gain: Deprival-Superreaction Tendency
I hate losing a $10 bill more than I enjoy finding one. The loss hurts a lot more than the gain seems to help. In investing, taking small losses over time in order to expose yourself to potentially large upsides (asymmetric opportunities) may be an optimal strategy, but is incredibly hard on the psyche. Put another way, if a gambler turns $10 into $100 at a slot machine, and then turns that $100 into zero, he will react as if he’s lost $100, when in fact he has only lost $10. To counter this tendency, think in terms of absolutes when analyzing wins and losses.
15. You think and act like the people around you: Social-Proof Tendency
Have you ever found yourself crossing your arms moments after the person you are talking to has done so? We’ve all heard of the experiment where someone walks into an elevator filled with people facing the wrong way, and the person turns around to face the wrong direction with them.
We think and act like the people around us because of social proof. This has tremendous consequences in business. It means you should try to stop bad habits before they spread, and you should promote positive actions to ensure everyone takes notice.
When I’m making a decision, I try to weigh it based on my internal moral compass first and avoid looking at what others are doing.
16. You are hypersensitive to contrast & ignore absolute values: Contrast-Misreaction Tendency
Our eyes evolved to identify and react to movement; to find the contrast in a static background. And so our brains followed. We are hypersensitive to contrast, while generally ignoring absolute values. This is why you see many high-priced items on “sale” at the grocery store - the store marks them up ridiculously high, and then puts the product on “sale” for the standard price. If I were to try and sell you something, I would show you two terrible iterations at extremely high prices, and then introduce a sub-par option at a slightly-too-high price to make the sale. How can you combat this? Focus on absolute values, not the contrast between values.
17. You make bad decisions under stress: Stress-Influence Tendency
Stress produces adrenaline and cortisol in the body, priming it for emergency action. Your muscles tense up, your heart rate increases and your senses sharpen. This state of body and mind cripples your ability to make solid, measured decisions. Stress also makes some of our other biases more profound, like our tendency to follow the crowd. If the price of a stock you own is dropping like a brick from the sky, you know that other people are selling and will be tempted to sell yourself in a panic, despite that being the worst course of action you could take. The solution? Delay your decision until the stress has passed, and don’t look to the crowd for answers.
18. You overemphasize what is immediately available to you: Availability-Misweighing Tendency
We’ve all heard the phrase, “out of sight, out of mind.” And it’s true. We place too much importance on the facts that we have in front of us at any given moment and less importance on the facts not immediately available to us. To beat this bias, develop checklists and procedures to make sure you are considering important factors outside your immediate view.
19. You lose the skills you don’t use every day: Use-It-or-Lose-It Tendency
“Use it or lose it.” With disuse, you’ll lose skills over time. If you want to keep a rarely used skill sharp, find a way to work it into daily practice. I practice a component of my investing every day in one way or another, whether it’s drafting an article for this site, penning a back-of-the-napkin company valuation, or reading a few pages from an annual report. If you become highly fluent in a skill, you’ll lose it more slowly and be able to pick it up faster when you refresh it with something new.
20. You underestimate the power of addiction: Drug-Misinfluence Tendency
Avoid chemical addiction at all costs. And if you do suffer from addiction, fight it with everything you have. Addiction is a simple way to drastically decrease your chances of success in business and in life.
21. You lose mental abilities as you age: Senescence-Misinfluence Tendency
As we get older, our mental abilities decline - it’s just the way it is. I am grateful I’m not dealing with this yet, but it’s going to happen to all of us and there’s no stopping it. It may be possible to slow the decline by continuing to think and learn as you age, so make a commitment to yourself to never stop learning.
22. You were born to follow the leader: Authority-Misinfluence Tendency
From kings and queens to presidents and elected officials, society is organized in follow-the-leader hierarchies because that’s how our minds work. We have a bias from authority. Many are born to follow, and few are born to lead. And there is great pain to suffer if a leader is wrong or their directive is misinterpreted. Don’t let this tendency to follow pull you down a road to ruin when you know that’s where you are headed.
23. You waste a lot of time: Twaddle Tendency
Humans waste a lot of time talking about nothing at all. Or by flicking through Instagram, Facebook and Twitter, and suddenly realizing an hour has passed. Value your time, and stay far away from time-wasters if you need to get serious work done.
24. You like to reason through problems: Reason-Respective Tendency
Humans love to solve puzzles; to think about problems and find solutions. We also love to know the reason behind other people’s decisions. As a leader, it’s good practice to 1) accurately think through your reasons for a decision, and 2) share those reasons with your team. You’ll find them much more receptive to your solution when they understand how you found it.
25. You can achieve unimaginable results when everything is working towards the same goal: Lollapalooza Tendency
From Apple to Microsoft, to Google, to Amazon, the success of each great business is a merging of these factors towards the same goal. As an example, I’ve been a fan of the most dysfunctional sports franchise in history for my entire life. The only explanation for this epic disaster of a management team is the confluence of all these mental biases working together to come to the wrong conclusions time after time. And what great suffering it has caused me in the meantime! On the other hand, if you can understand and use these biases in your favor (let’s say to sell flowers), you can find riches beyond your wildest dreams. The choice is yours!
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Munger, C. T., & Kaufman, P. D. (2008). Poor Charlie's almanack: The wit and wisdom of Charles T. Munger. Virginia Beach, Va: Donning Co. Pub.