These 4 Common Biases Could Be Sabotaging Your Decisions
Our minds are incredible, but they’re not always rational. Cognitive biases — mental shortcuts and errors in judgment — can often lead us astray, influencing decisions about money, time, and relationships.
Here I’ll break down four of the most common biases, show how they play out in everyday life, and provide practical solutions to avoid them.
1. Anchor Bias
Anchor bias occurs when we rely too heavily on the first piece of information (the "anchor") presented to us, even if it’s arbitrary.
Everyday Example:
Imagine you’re shopping for a shirt without a set budget in mind. The salesperson shows you a shirt for ₹2,000. You reject it as too expensive, so they offer a ₹1,500 shirt. Finally, you settle for one priced at ₹1,200.
Here’s the catch: Your original budget — ₹800 — was never part of the conversation. Instead, you anchored your decisions to the initial price of ₹2,000. Compared to that, ₹1,200 felt reasonable, even though it exceeded your intended spend.
How to avoid it:
- Set your own anchor before entering any negotiation or making a decision. For example, decide your budget beforehand.
- Be cautious of external anchors that influence not just money but time, resources, and emotions.
2. Sunk Cost Bias
This bias makes us persist in an endeavor because of the resources (money, time, or effort) we’ve already invested, even when it’s clear we’re not getting returns.
Everyday Example:
You spend ₹1,000 and 30 minutes to and from the workshop repairing an old mixer that still doesn’t work properly. Instead of discarding it, you spend another ₹500 and another 30-minute commute, hoping to fix it. Eventually, you’ve sunk ₹1,500 and an hour plus productive energy into something that should have been replaced.
How to avoid it:
- Accept your mistakes. Understand that what’s gone is gone, and throwing more resources at a failing cause only deepens the loss.
- Apply logic, not emotion. Ask yourself: “If I hadn’t already spent on this, would I invest in it now?”
3. “I Know It All” Bias
This bias occurs when people with limited knowledge overestimate their understanding of a subject.
Everyday Example:
A high-risk mutual fund gives great returns, and you invest some money. Encouraged by this success, you believe you’ve mastered investing. Confidently, you put all your savings into the same fund. Then, the market drops, and you lose a significant portion of your money.
How to avoid it:
- Stay humble: Acknowledge the limits of your knowledge.
- Gather knowledge from different sources: books, videos, podcasts.
4. Loss Aversion Bias
We tend to prefer avoiding losses rather than acquiring equivalent gains, often making irrational decisions because of how options are framed.
Everyday Example:
Two mutual fund advertisements:
- "This fund has a 70% chance of high returns."
- "This fund has a 30% chance of low returns."
Most people choose the first one, even though the metric is the same. The fear of loss makes the second option seem riskier.
How to avoid it:
- Focus on facts, not messaging.
- Recognize when you’re being swayed by how information is framed.
So?
Cognitive biases are sneaky, but recognizing them is the first step to overcoming their influence. Whether you’re making financial investments, deciding how to spend your time, or managing relationships, pausing to think critically can save you from poor decisions.
Next time you’re in a situation that demands careful judgment, ask yourself:
- Have I set my own anchor?
- Am I chasing sunk costs?
- Am I overestimating my knowledge?
- Am I reacting emotionally to a loss?
Mastering these biases isn’t just about avoiding mistakes — it’s about making smarter, more intentional decisions.
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