(Roughly) Daily

And like scientists, so all of us…

Science has shown that we tend to make all sorts of mental mistakes, called “cognitive biases”, that can affect both our thinking and actions. These biases can lead to us extrapolating information from the wrong sources, seeking to confirm existing beliefs, or failing to remember events the way they actually happened!

To be sure, this is all part of being human—but such cognitive biases can also have a profound effect on our endeavors, investments, and life in general.

…

Humans have a tendency to think in particular ways that can lead to systematic deviations from making rational judgments.

These tendencies usually arise from:

• Information processing shortcuts

• The limited processing ability of the brain

• Emotional and moral motivations

• Distortions in storing and retrieving memories

• Social influence

Cognitive biases have been studied for decades by academics in the fields of cognitive science, social psychology, and behavioral economics, but they are especially relevant in today’s information-packed world. They influence the way we think and act, and such irrational mental shortcuts can lead to all kinds of problems in entrepreneurship, investing, or management.

Here are five examples of how these types of biases can affect people in the business world:

1. Familiarity Bias: An investor puts her money in “what she knows”, rather than seeking the obvious benefits from portfolio diversification. Just because a certain type of industry or security is familiar doesn’t make it the logical selection.

2. Self-Attribution Bias: An entrepreneur overly attributes his company’s success to himself, rather than other factors (team, luck, industry trends). When things go bad, he blames these external factors for derailing his progress.

3. Anchoring Bias: An employee in a salary negotiation is too dependent on the first number mentioned in the negotiations, rather than rationally examining a range of options.

4. Survivorship Bias: Entrepreneurship looks easy, because there are so many successful entrepreneurs out there. However, this is a cognitive bias: the successful entrepreneurs are the ones still around, while the millions who failed went and did other things.

5. Gambler’s Fallacy: A venture capitalist sees a portfolio company rise and rise in value after its IPO, far behind what he initially thought possible. Instead of holding on to a winner and rationally evaluating the possibility that appreciation could still continue, he dumps the stock to lock in the existing gains.

An aid to thinking about thinking: “Every Single Cognitive Bias in One Infographic.” From DesignHacks.co via Visual Capitalist.

And for a fascinating look of cognitive bias’ equally dangerous cousin, innumeracy, see here.

* Saul Perlmutter, astrophysicist, Nobel laureate

###

As we cogitate, we might recall that it was on this date in 1859 that “The Carrington Event” began. Lasting two days, it was the largest solar storm on record: a large solar flare (a coronal mass ejection, or CME) that affected many of the (relatively few) electronics and telegraph lines on Earth.

A solar storm of this magnitude occurring today would cause widespread electrical disruptions, blackouts, and damage due to extended outages of the electrical grid. The solar storm of 2012 was of similar magnitude, but it passed Earth’s orbit without striking the planet, missing by nine days. See here for more detail on what such a storm might entail.