You Are Not As Rational As You Think
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The document explores the concept of heuristics, mental shortcuts people use to make rapid decisions, and the various cognitive biases that can lead to systematic errors in judgment. It highlights specific biases such as anchoring bias, confirmation bias, availability heuristic, gambler’s fallacy, planning fallacy, and sunk cost fallacy, illustrating how these affect our daily decision-making processes. The findings, derived from the works of psychologists Daniel Kahneman and Amos Tversky, reveal the discrepancies between our perceived logical reasoning and the irrationality embedded in human behavior.
You Are Not As Rational As You Think
- 1. Rational You are not as As You Think An Insight To The Processes Behind Those Irrational Choices That We Make All The Time (Without Even Realizing)
- 2. Illustrated by Yang Ao Wei [email protected] ADRENALINE (Fight or Flight Neurotransmitters) SEROTONIN (Mood Neurotransmitters) ENDORPHINS (Euphoria Neurotransmitters) DOPAMINE (Pleasure Neurotransmitters) GLUTAMATE (Memory Neurotransmitters) NORADRENALINE (Concentration Neurotransmitters)
- 3. Imagine this
- 5. Ahead, you saw this huge, fierce-looking pit bull sitting in the middle of the path.
- 7. Would you look at the dog and start analyzing stuff like these?
- 8. Would you look at the dog and start analyzing stuff like these?
- 10. Instead, your mind tells you just one thing -
- 12. The logical thing to do then, is to get away from it.
- 14. . Right from the moment you saw the dog, to the time you turned away from the pathway ahead
- 15. . – happened in a matter of a split-second.
- 16. In psychology, such mental ability that allows people to decide and think rapidly without being burdened by overwhelming information, is known as:
- 17. HEURISTICS
- 18. Heuristics are mental shortcuts or strategies that people use to form judgements and make decisions without having to spend too much time researching and analyzing information.
- 19. These rule-of-thumb strategies shorten decision-making time and allow people to function without constantly stopping to think about their next course of action.
- 20. Whether we are aware of it or not, we apply heuristics in our everyday life whenever we’re trying to make a decision or to solve a problem.
- 21. We so frequently and automatically employ these efficient mental rules because they work and serve us well under many circumstances.
- 22. Unfortunately, heuristics at times, can also lead to severe and systematic errors.
- 23. When this happens, it can result in what is known as:
- 24. Cognitive Biases
- 25. Cognitive biases are habitual and predictable ways of thinking that leads to errors .
- 26. They are the innate tendencies of the human mind to think, judge, and behave in irrational ways.
- 27. When we are making judgments and decisions about the world around us, we like to think that we are objective, logical, and capable of taking in and evaluating all the information that is available to us.
- 28. The reality is, however, that our judgments and decisions are often riddled With errors and influenced by a wide variety of biases.
- 29. Interestingly, many of us are largely unaware of these built -in psychological inefficiencies despite the frequency with which they occur in our daily lives and the regularity with which we fall victim to them.
- 30. So… Without further ado, let us start to explore some of these most common cognitive biases.
- 32. You had just decided to use your bonus to buy yourself a new car.
- 33. You did some research online and found that the average price of that model you wanted was $26,000.
- 34. You then went shopping at the local car lot and the dealer offered you the same vehicle for $25,000, which you gladly and immediately accepted.
- 35. That’s $1,000 less than what you were expecting to pay! $ 1,000 OFF!
- 36. Later on, you found out that another car dealer was offering the exact same model for just $22,000!
- 37. That was a full $3,000 less than what you paid for, and $4,000 less than the average price you found online. -$ 3,000 -$ 4,000
- 38. Afterwards, you might berate yourself for making that quick decision to buy on the first offer and not shopping around more for a better deal!
- 40. When people are trying to make a decision, they often use an “anchor” or focal point as a reference or starting point.
- 41. Studies have shown that people have the tendency to rely too much on the very first piece of information that is offered (the “anchor”) when making decisions.
- 42. In short, it means that we favor the first bit of information we learn.
- 46. Now, back to the car buying experience we talked about earlier.
- 47. Since your initial research indicated that $26,000 was the average price, the first offer you encountered seemed like a great deal.
- 48. You overlooked further information, such as the possibility that other dealers might have lower prices, and made a decision on the information you already had, which served as an anchoring point in your mind.
- 49. In 1998, a group of psychologists designed a field study to look at how setting Purchase Quantity Limits affect buying behavior.
- 50. 79¢
- 51. Cans of soup were put on sale with a sign reading:
- 52. Cans of soup were put on sale with a sign reading:
- 53. Most people concluded this limit was there to protect the store from being wiped out of the sale item of overly-eager bargain hunters.
- 54. However, this limit served a very different purpose.
- 55. The results showed that purchase limits can actually increase sales.
- 56. shoppers who bought soup from the display with no limit purchased an average of 3.3 cans of soup,
- 57. whereas buyers with limits of 12 purchased an average of 7 cans of soup. shoppers who bought soup from the display with no limit purchased an average of 3.3 cans of soup,
- 58. The brain anchored with the number 12 and adjusted downward.
- 59. The anchoring effect impacts many areas of our daily lives - way beyond financial and purchasing decisions.
- 61. Let’s say, you are someone who strongly believes in astrology.
- 62. As a strong believer, you would go through the readings of your personal horoscope every day.
- 63. Naturally, you would then look for evidence which supports those forecasts or interpret events in ways that align your zodiac predictions.
- 65. People have the tendency to favor information, ideas and opinions that confirm their beliefs.
- 66. They also tend to selectively search for evidence to support those beliefs, while discounting or ignoring everything else which contradicts them.
- 67. When people want a certain idea/concept to be true, they simply end up believing it to be true.
- 68. Beliefs
- 72. Confirmation bias tells us that we don’t perceive circumstances objectively -
- 73. Confirmation bias tells us that we don’t perceive circumstances objectively - We only pick out those bits of data that make us feel good because they validate our pre-existing beliefs, opinions and prejudices.
- 74. . If you believe in UFOs and aliens (or any other weird stuff) ……
- 75. . Then, you’ll probably be spending your time trying to search for information and evidence to prove that they exist, so as to confirm your belief.
- 77. Are there more English words that begin with the letter R or are there more English words with R as the 3rd letter?
- 78. Let’s try an exercise to figure that out.
- 79. Think of 10 English words that begin with the letter R. r_________ r_________ r_________ r_________ r_________ r_________ r_________ r_________ r_________ r_________
- 80. This should be pretty easy, isn’t it? rack ribbon rose right rum rabbit run rather ruby rubbish
- 81. Now, try to think of 10 English words with R as the 3rd letter. __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______
- 82. Try it. Don’t cheat! __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______ __r_______
- 83. Did it take you a longer time to think of these words? arrest paragraph carry screw cargo correct direct throw surface air
- 84. After doing this exercise, are you now convinced that there are more words beginning with the letter R than there are words with R as the 3rd letter?
- 85. Well, according to Quora, there are 22,809 English words that have R as the third letter, but only 8,955 words that begin with R.
- 87. The availability heuristic is a useful mental shortcut that aids us in determining the frequency and probability of something that might happen.
- 88. It is the ease with which instances come to mind.
- 89. When we are trying to make a decision, a number of related events or situations would immediately spring to our mind.
- 90. And because those events are more readily available in our memories, we tend to assume that those situations happen more frequently than others.
- 91. We then make our decisions and choices based on those assumptions, often, without even considering other alternatives.
- 92. Things that come to mind with more ease are believed to be far more common and more accurate reflections of the real world.
- 93. Also, under the influence of availability heuristic, people have the tendency to heavily weigh their judgments toward more recent information, making new opinions biased toward the latest news that they received.
- 94. Many of us simply love thriller movies featuring terrifying man-eating sharks.
- 95. It has been observed that at times when such blockbusters were being screened, the news media often joined the hype by making reports of Shark attacks more frequently.
- 96. Regularly flashing and exposing news and media about a certain topic (e.g. shark attacks) to people can lead them to believe that events relating to that topic are more common than they truly are.
- 98. According to National Geographic, the chance of you, or anyone being killed by a shark is 1 in 3,700,000.
- 99. By the way, do you know that you are far, far more likely to die from a flu or from a fall?
- 100. According to statistics… This is the chance of you dying from a flu or from a fall in your lifetime:
- 101. 1 in 63 According to statistics…… This is the chance of you dying from a flu or from a fall in your lifetime:
- 102. 1 in 63 1 in 218 According to statistics…… This is the chance of you dying from a flu or from a fall in your lifetime:
- 104. Let’s say if you toss a coin……
- 105. and you got tails up for 6 times in a row.
- 106. How is that likely to affect your prediction for the next toss?
- 107. Most of us would be very tempted to assume that a head up is more likely in the next toss, don’t we?
- 108. But just how likely is that?
- 109. The truth is, regardless of the past 6 results, the chance of getting either one in the next toss remains exactly the same as before, i.e. -
- 110. The truth is, regardless of the past 6 results, the chance of getting either one in the next toss remains exactly the same as before, i.e. -
- 112. The gambler’s fallacy is the tendency to expect outcomes to “even out” over the short run for random events.
- 113. It is the mistaken belief that, for random independent events, the lower the frequency of an outcome in the recent past, the greater is the likelihood of that outcome in the future.
- 114. The belief is false because it is based on the assumption that chance is “self-correcting”, so that a shift in one direction indicates an impending shift in the opposite direction.
- 115. It springs out of our misinterpretation of random events because our perception of how random things ought to be, is just not random at all.
- 116. Way back in the Year 1913, at the Monte Carlo Casino……
- 117. People were running to this particular table of roulette where 16 blacks had come out in a row.
- 118. Everyone was trying to put a Red bet down because it was “supposed to” due for one.
- 119. 17, 18, 19, 20…….
- 120. It went up to 26 blacks in a row and the casino made millions of dollars in those few minutes!
- 121. The Planning Fallacy
- 122. You have just received a new project.
- 123. You looked at the resources you currently have, made a list of those that you lack but needed, and calculated all the possible costs involved.
- 124. Then, you estimated that it would probably take you 30 to 40 days to complete the project.
- 125. It turned out that you took more than 60 days to complete it, and at a cost nearly twice that of what you had originally intended.
- 127. The planning fallacy is the tendency for people to underestimate the time that it will take to complete an upcoming task.
- 128. It is a form of optimistic bias and happens despite people knowing that similar tasks had taken longer to complete in the past.
- 129. According to cognitive explanations, the bias results from the kinds of information that people consider.
- 130. When making a task-completion prediction, people’s natural inclination is to plan out the specific steps that they will take to successfully complete the project.
- 131. The problem with this approach is that events don’t usually unfold exactly as planned.
- 132. Given the vast amount of potential obstacles, there is a great likelihood that people will encounter unexpected problems, delays, and interruptions.
- 133. The people who built the Sydney Opera House were expecting that it would be completed in the Year 1963.
- 134. However, it was only until 10 years later - in 1973 - that a scaled-down version finally opened.
- 135. The original cost was estimated at $7 million.
- 136. But its delayed completion led to a cost of $102 million; 14.5x more than that which was planned.
- 137. The Sunk Cost Fallacy
- 138. You’d just bought a pair of tickets to a concert which you were really excited about.
- 139. Unfortunately, on the actual day of the event, you fell sick.
- 140. Although you were unwell and most definitely wouldn’t enjoy it, you still went anyway.
- 141. You didn’t want to “waste your money”, so you rather went and suffered.
- 143. A sunk cost is any past cost that has already been paid and cannot be recovered.
- 144. The sunk cost may not necessarily be a precise quantity, but an economic term for a sum paid, in the past, that is no longer relevant to decisions about the future.
- 145. The sunk cost fallacy is the tendency of people to irrationally follow through on an activity that is not meeting their expectations because of the time and/or money they have already spent on it.
- 146. It arises out of aversion to loss and describes how a past decision can influence a present or future decision.
- 147. It involves an individual making a decision about a current situation based on what they have previously invested in the situation.
- 148. Sunk cost fallacy makes you finish the meal when you are already full.
- 149. It makes you hold on to investments that are underperforming.
- 150. It makes you sit through a sucky movie which could bore you to death.
- 151. It fills your home with things you no longer want or use.
- 152. Main ideas Heuristics Cognitive biases The anchoring Bias The confirmation Bias The Availability Heuristic The Gambler’s Fallacy The planning Fallacy The Sunk Cost Fallacy
- 154. The term “heuristic reasoning” is popularized by the most influential psychologists working in the area of Human Judgment - Daniel Kahneman and Amos Tversky.
- 155. Kahneman, an Israeli- American psychologist who originally studied attention, became world famous when he published (1970) a series of experimental studies with Tversky on how people assess probabilities in everyday life, which shortcuts (heuristics) they use and what biases that can occur in such assessments.
- 156. They also developed a theory of decision making under uncertainty, which at key points deviates from prevailing economic models.
- 157. For these works, Kahneman won the Nobel Prize in Economics in 2002.