Cognitive Biases

Behavioral economics…

• Is a field of economics that studies people who make rational and objective decisions.

• Analyzes how different economies around the world behave over time.

• Tracks and examines stock market trends over a certain period of time

• Combines economics and psychology to study why people behave the way they do in the real world

Cognitive bias is…

• An error in the way we think that can influence our decisions

• The desire to seek out information that confirms our existing beliefs

• The belief that our abilities are better than they actually are

• The concept of placing more value on an item when we own it

You go to a restaurant and order a big meal. Even though you’re full, you keep eating because it was expensive. This is an example of...

• Mental Accounting

• The Sunk Cost Fallacy

• Fear of Missing Out

Tammy just got a raise, she is living comfortably now and needs to decide what to do with the extra money she is getting each month. She decides to take her family on a vacation rather than start a retirement account, because YOLO. This is an example of which type of cognitive bias.

• Hyperbolic Discounting

• Sunk Cost Fallacy

• Loss Aversion

Jake's friends are planning a trip to King's Island. Jake can't go because doesn't have any money due to a recent car repair and he is scheduled to work that day. He decides to put the King's Island trip on his credit card and call off work. Which cognitive bias is impacting Jake's decision making?

• Sunk Cost Fallacy

• FOMO

• Loss Aversion

Allison is planning the family budget and money is very tight. She manages to reduce the food budget to the bare minimum by skimping on basics like eggs and milk. Later in the week Allison has an opportunity to go out with friends. She goes and spends $50, because YOLO. Which cognitive bias does this demonstrate.

• Mental Accounting

• Sunk Cost Fallacy

• Loss Aversion

Jonas's family is growing and they are out of space in their two-bedroom home. Even though he knows they need to sell and find someplace bigger he hesitates to sell because his house is worth less than when he bought it.

• Hyperbolic Discounting

• Loss Aversion

• FOMO

Choose two of the cognitive biases you learned about.

ENDOWMENT EFFECT, LOSS AVERSION, SUNK COST FALLACY, FOMO, MENTAL ACCOUNTING, TRANSACTION UTILITY, HYPERBOLLIC DISCOUNTING

1) Using the "Ten Tips to Overcome Cognitive Bias", brainstorm one concrete strategy you can use to overcome each bias.

2) Explain how this strategy might help.