A cognitive bias is a systematic error in thinking that occurs when people are processing and interpreting information in the world around them.
There are tons of cognitive biases but you will discover in this short article a list of biases which affect more specifically our investment decisions.
List of cognitive biaises
- Ambiguity effect
The tendency to avoid options for which missing information makes the probability of possible outcomes unknown.
- Anchoring
The tendency to rely too heavily, or “anchor,” on one specific piece of information when making decisions (also called “insufficient adjustment”).
- Belief bias
An effect where someone’s evaluation of the logical strength of an argument is biased by the believability of the conclusion.
- Confirmation bias
The tendency to search for or interpret information in a way that confirms one’s preconceptions.
- Congruence bias
The tendency to test hypotheses exclusively through direct testing, in contrast to tests of possible alternative hypotheses.
- Conjunction fallacy
The tendency to assume that specific conditions are more probable than general ones.
- Denomination effect
The habit to spend more money when it is denominated in small amounts (e.g. coins) rather than large amounts (e.g. bills).
- Endowment effect
The fact that people often demand much more to give up an object than they would be willing to pay to acquire it.
- Framing effect
Drawing different conclusions from the same information, depending on how that information is presented.
- Gambler’s fallacy
The tendency to think that future probabilities are altered by past events.
- Hindsight bias
Sometimes called the “I-knew-it-all-along” effect, the tendency to see past events as being predictable at the time those events happened.
- Loss aversion
The higher sensitivity to losses than to gains
- Mere exposure effect
The tendency to express undue liking for things merely because of familiarity with them.
- Omission bias
The tendency to judge harmful actions as worse, or less moral, than equally harmful omissions (inactions).
- Optimism bias
The tendency to be over-optimistic, overestimating favorable and pleasing outcomes.
- Planning fallacy
The tendency to underestimate task-completion times.
- Primacy effect
The greater ease of recall of initial items in a sequence compared to items in the middle of the sequence.
- Recency bias
A cognitive bias that results from disproportionate salience of recent stimuli or observations – the tendency to weigh recent events more than earlier events.
- Status quo bias
The tendency to like things to stay relatively the same.
- Defensive attribution hypothesis
Defensive attributions are made when individuals witness or learn of a mishap happening to another person. In these situations, attributions of responsibility to the victim or harm-doer for the mishap will depend upon the severity of the outcomes of the mishap and the level of personal and situational similarity between the individual and victim. More responsibility will be attributed to the harm-doer as the outcome becomes more severe, and as personal or situational similarity decreases.
- Dunning–Kruger effect
An effect in which incompetent people fail to realize they are incompetent, because they lack the skill to distinguish between competence and incompetence.
- Egocentric bias
Fundamental attribution error – the tendency for people to over-emphasize personality-based explanations for behaviors observed in others while under-emphasizing the role and power of situational influences on the same behavior.
- Halo effect
The tendency for a person’s positive or negative traits to “spill over” from one area of their personality to another in others’ perceptions of them.
- Ingroup bias
The tendency for people to give preferential treatment to others they perceive to be members of their own groups.
- Projection bias
The tendency to unconsciously assume that others (or one’s future selves) share one’s current emotional states, thoughts and values.
- Self-serving bias
The tendency to claim more responsibility for successes than failures. It may also manifest itself as a tendency for people to evaluate ambiguous information in a way beneficial to their interests.
- Worse-than-average effect
A tendency to believe ourselves to be worse than others at tasks which are difficult.
References
List from Wikipedia
“Making great decisions,” McKinsey Quarterly, Avril 2013, by Dan Lovallo and Olivier Sibony