The Cognitive Biases Impeding Our Growth: Prospect Theory, Consistency Bias, and the Bias to Avoid Discomfort
Cognitive biases shape our reality, often more than we’d like to admit. These mental shortcuts, while sometimes beneficial, can often lead us to make errors in judgment and decision-making, impacting areas as significant as our wealth and health.
Today, we’ll delve into three of these biases – Prospect Theory, Consistency Bias, and the Bias to Avoid Discomfort – exploring their impacts and offering strategies to overcome them.
Prospect Theory: The Loss-Aversion Trap
Formulated by psychologists Daniel Kahneman and Amos Tversky, Prospect Theory suggests that we feel the sting of losses more intensely than we feel the pleasure of gains. This asymmetric value assignment to losses and gains can lead us to make irrational decisions, particularly in the realm of finance and health.
When it comes to finances, this loss-aversion tendency can cause us to hold on to losing investments longer than we should, hoping they’ll rebound, and to sell winning investments too early to lock in gains. This behavior, driven by the fear of potential losses, often results in suboptimal investment outcomes.
In the health domain, Prospect Theory might contribute to neglecting beneficial habits due to their upfront costs. The initial effort and time required to adopt a healthy lifestyle – be it regular exercise, healthier food choices, or regular health checks – might seem like a ‘loss’, discouraging many from making these changes.
Consistency Bias: The Growth-Stifling Trap
Our next bias, Consistency Bias, leads us to believe that our past attitudes and behaviors align more closely with our current ones than they might. This cognitive trick can distort our self-perception, undermining our potential for personal growth and development.
In financial matters, Consistency Bias can discourage us from exploring new opportunities or altering our financial habits. If we’ve struggled with saving or made poor investment decisions in the past, this bias may convince us that we’re inherently bad with money. This skewed self-perception can deter us from learning about finance, investing, or seeking professional advice, leading to missed wealth-creation opportunities.
Bias to Avoid Discomfort: The Comfort-Zone Trap
Finally, we confront our natural bias to avoid discomfort. This bias can lead us to dodge changes that may cause short-term discomfort but have long-term benefits, impacting both our wealth and health.
Financially, this bias can prevent us from engaging in potentially uncomfortable yet profitable actions, like asking for a raise or investing in unfamiliar markets. This aversion to discomfort can keep us tethered to our current financial situation, thwarting wealth accumulation.
Overcoming Cognitive Biases
Now that we’ve understood these biases, how do we overcome them?
For Prospect Theory, consider the overall benefits versus costs, focusing on long-term gains. Remind yourself that short-term losses, whether financial or in terms of effort and time, often pave the way for long-term benefits. Professional financial advice can also be beneficial in making rational investment decisions.
To tackle Consistency Bias, acknowledge that your past does not define your future. Your financial or health mistakes or difficulties do not limit your potential for growth. Engage in continuous learning, seek advice, and remain open to change.
Finally, to overcome the bias to avoid discomfort, understand that growth often comes with some level of discomfort. Whether it’s negotiating a raise, investing in the stock market, or starting a new exercise regime, the initial discomfort is often a sign of growth and progress.
Cognitive biases are an intrinsic part of human nature, but awareness and deliberate action can help us mitigate their impact, leading us towards better financial and health outcomes.