Thinking is in itself not pure, but prone to error. Cognitive traps aren't just occasional errors in judgment but rather routine mistakes we stumble over through generations. We value sunk costs instead of future outcomes. We seek evidence to justify our beliefs rather than form our beliefs based on evidence. We prefer wrong information to no information, and we fall prey to the delusion that more information guarantees better decisions. When we put a lot of energy into a task, we tend to overvalue the result. Often, we fail to think exponentially and probabilistically.
The failure to think clearly, or what experts call a “cognitive error” is a systematic deviation from logic—from optimal, rational, reasonable thought and behavior. By “systematic,” I mean that these are not just occasional errors in judgment but rather routine mistakes, barriers to logic we stumble over time and again, repeating patterns through generations and through the centuries.
If we can learn to recognize and evade the biggest errors in thinking—in our private lives, at work, or in government—we might experience a leap in prosperity. We need no extra cunning, no new ideas, no unnecessary goals, no frantic hyperactivity—all we need is less irrationality.
In daily life, because triumph is made more visible than failure, we systematically overestimate our chances of succeeding. As an outsider, we succumb to an illusion, and we mistake how minuscule the probability of success really is.
Investors frequently fall victim to the sunk cost fallacy. Often they base their trading decisions on acquisition prices. “I lost so much money with this stock, I can’t sell it now,” they say. This is irrational. The acquisition price should pay no role. What counts is the stock’s future performance (and the future performance of alternative investments.)
Reciprocity is a very useful survival strategy, a form of risk management. Without it, humanity would be long extinct. It is at the core of cooperation between people and a necessary ingredient for economic growth and wealth creation.
The confirmation bias is the mother of all misconceptions. It is the tendency to interpret new information so that it becomes compatible with our existing theories, beliefs, and convictions. In other words, we filter out any new information that contradicts our existing views.
We judge something to be beautiful, expensive, or large if we have something ugly, cheap, or small in front of us. We have difficulty with absolute judgments.
With the availability bias, we prefer the wrong information to no information.
Hindsight bias makes us believe we are better predictors than we actually are, causing is to be arrogant about our knowledge and consequently to take too much risk.
There are two types of knowledge. First, we have real knowledge. We see it in people who have committed a large amount of time and effort to understand a topic. The second type is chauffeur knowledge—knowledge from people who have learned to put on a show.
The illusion of control is the tendency to believe that we can influence something over which we have absolutely no sway. Do not think you command your life through life like a Roman emperor. Rather, you are the man with the red hat. Therefore, focus on a few things of importance that you can really influence.
Never judge a decision purely by its result, especially when randomness and “external factors” play a role. A bad result does not automatically indicate a bad decision and vice versa. So rather than tearing your hair out about a wrong decision, or applauding yourself for one that may have only coincidentally led to success, remember why you chose what you did.
Abundance makes you giddy, but there is a limit. When it is exceeded, a surfeit of choices destroys the quality of life. The technical term for this is the paradox of choice.
We respond to the expected magnitude of an event, but not to its likelihood. In other words: We lack an intuitive grasp of probability. And it leads to errors in decision making.
Induction seduces us and leads us to conclusions such as: “Mankind has always survived, so we will be able to tackle any future challenges, too.” Sounds good in theory, but what we fail to realize is that such a statement can only come from a species that has lasted until now. To assume that our existence to date is an indication of our future survival is a serious flaw in reasoning.
The fear of losing something motivates people more than the prospect of gaining of equal value.
In groups, we tend to hold back not only in terms of participation but also in terms of accountability. People behave differently in groups than when alone. The disadvantages of groups can be mitigated by making individual performances as visible as possible.
We can understand linear growth intuitively. However, we have no sense of exponential growth. Why is this? Because we didn’t need it before. Our ancestors’ experiences were mostly of the linear variety. Whoever spent twice the time collecting berries earned double the amount. Whoever hunted two mammoths instead of one could eat for twice as long. In the Stone Age, people rarely came across exponential growth. Today, things are different.
The halo effect occurs when a single aspect dazzles us and affects how we see the full picture. The psychologist Edward Lee Thorndike concluded that a single quality (e.g., beauty, social status, age) produces a positive or negative impression that outshines everything else, and the overall effect is disproportionate.
It’s not what you say but how you say it. If a message is communicated in different ways, it will also be received in different ways. In psychologists’ jargon, this technique is called framing.
In new or shaky circumstances, we feel compelled to do something, anything Afterward we feel better, even if we have made things worse by acting too quickly or too often.
We should be careful to get out of an experience only the wisdom that is in it—and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot-stove lid again—and that is well; but also she will never sit down on a cold one anymore.
The introduction of “now” causes us to make inconsistent decisions. Science calls this phenomenon hyperbolic discounting. Put plainly: The closer a reward is, the higher our “emotional interest rate” rises and the more we are willing to give up in exchange for it.
When justifying your behavior, you encounter more tolerance and helpfulness. It seems to matter very little if your excuse is good or not. Using the simple validation “because” is sufficient.
Decision fatigue is perilous: As a consumer, you become more susceptible to advertising messages and impulse buys. As a decision maker, you are more prone to erotic seduction. Willpower is like a battery. After a while, it runs out and needs to be recharged. How do you do this? By taking a break, relaxing, and eating something.
A single outlier has radically altered the picture, rendering the term “average” completely meaningless.
When people do something for well-meaning, non-monetary reasons, payments throw a wrench into the works. Financial reward erodes any other motivations.
Verbal expression is the mirror of the mind. Clear thoughts become clear statements, whereas ambiguous ideas transform into vacant ramblings. The trouble is that, in many cases, we lack very lucid thoughts. Therefore, if you have nothing to say, say nothing.
Information bias: the delusion that more information guarantees better decisions.
Effort justification: when you put a lot of energy into a task, you tend to overvalue the result.
Raise expectations for yourself and for the people you love. This increases motivation. At the same time, lower expectations for things you cannot control.
If you like something, you believe that the risks are smaller and the benefits greater than they actually are. If you don’t like something, the opposite is true. Whether you like it or not, we are puppets of our emotions. We make complex decisions by consulting our feelings, not our thoughts.
The belief that reflection leads to truth or accuracy is called the introspection illusion. Because we are so confident of our beliefs, we experience three reactions when someone fails to share our view: (1) Assumption of ignorance, (2) Assumption of idiocy, and (3) Assumption of malice.
Our brain is not built to recognize the truth; instead, its goal is to leave behind as many offspring as possible. Whoever seemed courageous and convincing created a positive impression, attracted a disproportionate amount of resources, and this increased their chances of succeeding. Doubters are less sexy.
Risk means that the probabilities are known. Uncertainty means that the probabilities are unknown. On the basis of risk, you can decide whether or not to take a gamble. In the realm of uncertainty, it’s much harder to make decisions. You can make calculation with risks, but not with uncertainty.
Money is money, after all. But we don’t see it that way. Depending on how we get it, we treat it differently. Money is not naked; it is wrapped in an emotional shroud.
We are confident that we notice everything that takes place in front of us. But in reality, we often see only what we are focusing on.
Essentially, if you think too much, you cut off your mind from the wisdom of your feelings. Emotions form in the brain, just as crystal-clear, rational thoughts do. They are merely a different form of information processing—more primordial, but not necessarily an inferior variant. In fact, sometimes they provide the wiser counsel.
We seldom forget uncompleted tasks; they persist in our consciousness and do not let up, tugging at us like little children, until we give them our attention. On the other hand, once we’ve completed a task and checked it off our mental list, it is erased from memory.
Absence is much harder to detect than presence. In other words, we place greater emphasis on what is present than on what is absent.
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