What is the Pseudocertainty Effect? The Pseudocertainty Effect occurs when an individual’s confidence in their judgment or decision increases, despite the presence of ambiguity or uncertainty. This can lead to overconfidence and poor decision-making. For example, imagine you’re trying to predict the outcome of a coin toss. You might feel more confident in your prediction […]
Cognitive Biases: Loss Aversion
What is Loss Aversion? Loss Aversion occurs when an individual’s sensitivity to losses exceeds their sensitivity to gains. In other words, the pain of a loss outweighs the pleasure of a gain. For example, imagine you have $100 in your pocket. If someone takes $20 from you, you might feel a strong sense of loss […]
Cognitive Biases: Endowment Effect
What is the Endowment Effect? The Endowment Effect occurs when an individual’s subjective valuation of an object increases simply because they possess it. This means that people tend to place a higher value on objects they own, compared to identical objects owned by others. For example, imagine two identical coffee mugs: one belongs to you […]
Cognitive Biases: Dread Aversion
What is Dread Aversion? Dread Aversion occurs when an individual’s perception of risk is distorted by their emotional response to a potential outcome. People tend to overestimate the likelihood or severity of negative outcomes, such as accidents, illnesses, or financial losses, due to the fear and anxiety associated with these events. For example, imagine a […]
Cognitive Biases: Disposition Effect
What is the Disposition Effect? The Disposition Effect occurs when an individual holds onto a losing investment due to an irrational attachment to it, even if it would be more prudent to sell and move on. This bias is often seen in financial markets, where investors may hold onto stocks that are no longer performing […]
Cognitive Biases: Ambiguity Effect
What is the Ambiguity Effect? The Ambiguity Effect occurs when individuals are faced with a choice between two or more options, one of which has an ambiguous outcome. Despite the potential benefits of the ambiguous option, people tend to prefer the option with a clear and certain outcome, even if it is less rewarding. For […]
Cognitive Biases: Zero-Sum Bias
What is the Zero-Sum Bias? The Zero-Sum Bias occurs when individuals perceive a situation as having only two possible outcomes: win or lose. They tend to believe that if one person wins, another must necessarily lose, and vice versa. This perception can lead people to view interactions and negotiations as zero-sum games, where the objective […]
Cognitive Biases: Time-Saving Bias
What is the Time-Saving Bias? The Time-Saving Bias occurs when people are presented with a choice between taking a shortcut or using a more efficient method to complete a task. Despite the potential benefits of these alternatives, individuals tend to overestimate the amount of time they will save by choosing the shortcut. This distorted perception […]
Cognitive Biases: Subadditivity Effect
What is the Subadditivity Effect? The Subadditivity Effect occurs when people are presented with multiple risks and asked to estimate the total probability of all these risks occurring. Despite having accurate information about each individual risk, individuals tend to underestimate the overall probability by adding up the probabilities in a suboptimal way. For example, if […]
Cognitive Biases: Plan Continuation Bias
What is the Plan Continuation Bias? The Plan Continuation Bias occurs when people exhibit a strong attachment to their original plans and are reluctant to change them, even in the face of new information or changing circumstances. This bias can lead individuals to continue with a plan that is no longer optimal, simply because it […]