What's a brain bias?

Cognitive biases interrupt our ability to make rational decisions in our personal and financial lives.

We come into this world with a hidden repertoire of biases that seduce us into acting irrationally in a variety of common situations. By producing fast decisions and strong actions, these behaviors were adaptive, enabled us to survive in a hunter-gatherer environment. Most biases operate outside conscious awareness. The short articles that follow are mainly about identifying them. That's the hard part. But once a bias has been identified, correcting it is straightforward and mechanical. Each one becomes a point of inquiry. Cognitive biases are also called "effects," "errors," "fallacies," "glitches," and "illusions."

The biases are energy efficient: There's only so much information that can be analyzed by our brains before a cognitive load maximum is reached, and in the lead-up to that load, our critical-thinking faculties get sloppier. That's when mental short-cuts, like the brain biases, are useful. The history of "Cognitive Load Theory" can be traced back to the beginning of Cognitive Science and the work of G.A. Miller (1956). He was one of the first to suggest our working memory capacity was limited.

The Confirmation Bias

The tendency to seek evidence that agrees with our position and dismiss evidence that does not.

Most humans instinctively avoid evidence (relevant facts) that contradicts their opinions. Contrary information is upsetting and confusing. We don't want to admit that our beliefs may be blatantly OTL. Listening to errors in our thinking feels like a smack in the gut. Wallowing in self-righteousness feels like love. This bias is so strong that even when we know about it, we find it hard to correct.

Michael Shermer, author of The Mind of the Market, says: "Confirmation Bias is where we look for and find confirmatory evidence for what we already believe and ignore disconfirmatory evidence."

Lewis Wolpert, author of Six Impossible Things before Breakfast, says: "Beliefs, once acquired, have a kind of inertia in that there is a preference to alter them as little as possible.  There is a tendency to reject evidence or ideas that are inconsistent with our beliefs." (page 85)

The Confirmation Bias sways us to...
•  favor evidence that agrees with your position.
•  believe the future will bring new evidence to support our opinion.
•  cling stubbornly and passionately to your position.
•  adopt positions from traditions, religions and ideologies.

Synonyms:  The Semmelweis Effect, the belief bias, belief preservation, biased assimilation, belief overkill, hypothesis locking, polarization effect, the Tolstoy syndrome, selective thinking, myside bias, law of fives, and Morton's demon. 

The Self-Serving Bias

The tendency to take credit for desirable outcomes and blame others for undesirable ones.

A student who gets a good grade on an exam might say, "I got an A because I am intelligent and I studied hard!" whereas a student who does poorly on an exam might say, "The teacher gave me an F because he doesn't like me!"

Three reasons have been proposed to explain the self-serving bias. The first explanation is motivational: people are motivated to protect their self-esteem, so create explanations that make them feel better. The second explanation focuses on making impressions on others: although people may not believe the content of a self-serving utterance, they may offer it to others to create a favorable impression. The third focuses on the mechanisms of memory: reasons for success might be more memorable than reasons for failure.

The Contrast Bias

The tendency to mentally upgrade or downgrade an object when comparing it to a contrasting object.

We constantly compare things, people and situations. We deem them bad, good or neutral depending on what we've recently experienced in the same category. We voted for Obama because we compared him to Bush. Contrast effects are common in human thinking.

• A hefted weight is perceived as heavier than normal when "contrasted" with a lighter weight. It is perceived as lighter than normal when contrasted with a heavier weight.
• An animal works harder than normal for a given amount of reward when that amount is contrasted with a lesser amount and works less energetically for that given amount when it is contrasted with a greater amount.
• A person appears more appealing than normal when contrasted with a person of less appeal and less appealing than normal when contrasted with one of greater appeal.

So if you were to compare your car to a clunker and not a Maserati, you'd feel better.

The Planning Fallacy

The tendency to underestimate the time is takes to complete a task.

The Sydney Opera House, which ran many years past its planned schedule, is a great example of this bias. Planners tend to focus on the project and underestimate time for sickness, vacation, meetings, and other "overhead" tasks. In one study, 37 students were asked to estimate the completion times for their senior theses. The average estimate was 33.9 days. Only about 30-percent of the students were able to complete their thesis in the amount of time they predicted, and the average actual completion time was 55.5 days. 

On the opening date for the St. Regis in Kauai: "Originally slated to accept reservations as early as March, the St. Regis public relations department released an official announcement Tuesday evening saying that the opening has been delayed until October 1." (The Garden Island; May 1, 2009)

The Just-World Bias

The tendency for people to believe the world is "just" and therefore people "get what they deserve."

People fantasize that the world is "just," so when they witness something bad happening to someone, they often rationalize it by searching for things the victim might have done to deserve it. "She brought it on herself because she..."  This deflects their anxiety, lets them continue to believe that the world is a just place, but at the expense of blaming victims for many things that weren't, objectively, their fault. A not-nice, but natural, way to judge people in need. We must learn to distinguish between true-karma and false-karma. The caste system in India is a classic case of false-karma because it sentences millions of the unborn to a slummy slot in life. 

The Loss-Aversion Bias

The tendency to find losses twice as painful as we find gains pleasurable.

“People hate losses (and their Automatic Systems can get pretty emotional about them). Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy....Consequently loss aversion produces inertia, meaning a strong desire to stick with your current holdings,” says Richard Thaler, author of Nudge: Improving Decisions About Health, Wealth and Happiness. Loss-aversion was first convincingly demonstrated by Amos Tversky and Daniel Kahneman. Tune into a fascinating Kahneman lecture here.

LOSS-AVERSION & MONEY MANAGEMENT: "Loss aversion also explains one of the most common investment mistakes: investors evaluating their stock portfolios are most likely to sell stocks that have increased in value. Unfortunately, this means that they end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since ultimately it leads to a portfolio composed entirely of shares that are losing money. Even professional money managers are vulnerable to this bias and tend to hold losing stocks twice and long as winning stocks. Why does an investor do this? Because he is afraid to take a loss—it feels bad—and selling shares that have decreased in value makes the loss tangible. We try to postpone the pain for as long as possible...The only people who are immune to this mistake are neurologically impaired people who can't feel any emotions at all. In most situations, these people have very damaged decision-making abilities. And yet, because they don't feel the extra sting of loss, they are able to avoid the costly emotional errors brought on by loss aversion," writes Jonah Lehrer in his new book, How We Decide.

LOSS-AVERSION & WAR: Nations have gone to war until their doom because of loss aversion. It simply means you refuse to admit you made a mistake. "Once we have committed a lot of time or energy to a cause, it is nearly impossible to convince us that it is unworthy." The real question is, "How bad do your losses have to be before you change course?" (Social Psychology Fourth Edition, Aronson et al., p. 175)

We are risk-loving over losses and risk-averse over gains.

The GroupThink Bias

The tendency to do (or believe) things because many other folks do. 

Decades of research show people tend to go along with the majority view, even if that view is objectively incorrect. Now, scientists are supporting those theories with brain images. A new study in the journal Neuron shows when people hold an opinion differing from others in a group, their brains produce an error signal. A zone of the brain popularly called the "oops area" becomes extra active, while the "reward area" slows down, making us think we are too different.

The two leading theories of conformity are that people look to the group because they're unsure of what to do, and that people go along with the norm because they are afraid of being different, said Dr. Gregory Berns, professor of psychiatry and behavioral sciences at Emory University School of Medicine in Atlanta, Georgia. Berns' research, which he describes in the book Iconoclast: A Neuroscientist Reveals How to Think Differently, found that brain mechanisms associated with fear and anxiety do play a part in situations where a person feels his or her opinion goes against the grain. 

Also called "Herd Behavior" and "The Bandwagon Effect" and "The Conformity Effect."

MANTRA: To act more rationally, I must not get swept up into group acting, thinking and feeling frenzies.

The Beautiful-People Bias

The tendency for beautiful people to receive more rewards than less attractive people.

Do pretty people earn more? Studies show attractive students get more attention and higher evaluations from their teachers, good-looking patients get more personalized care from their doctors, and handsome criminals receive lighter sentences than less attractive convicts. But how much do looks matter at work? The ugly truth, according to economics professors Daniel Hamermesh of the University of Texas and Jeff Biddle of Michigan State University, is that plain people earn 5 percent to 10 percent less than people of average looks, who in turn earn 3 percent to 8 percent less than those deemed good-looking. These findings agree with other research that shows the penalty for being homely exceeds the premium for beauty and that across all occupations, the effects are greater for men than women.

Size matters, too. A study released last year by two professors at the University of Florida and University of North Carolina found that tall people earn considerably more money throughout their careers than their shorter co-workers, with each inch adding about $789 a year in pay. A survey of male graduates of the University of Pittsburgh found that the tallest students' average starting salary was 12 percent higher than their shorter colleagues'. The London Guildhall study showed that overweight women are more likely to be unemployed and that those who are working earn on average 5 percent less than their trimmer peers.

According to Dr. Gordon Patzer, who has spent more than three decades studying and writing about physical attractiveness, human beings are hard-wired to respond more favorably to attractive people. Even studies of babies show they will look more intently and longer at prettier faces.

"Good-looking men and women are generally judged to be more talented, kind, honest and intelligent than their less attractive counterparts," Patzer says. "Controlled studies show people go out of their way to help attractive people—of the same and opposite sex—because they want to be liked and accepted by good-looking people."

These conclusions may not sound too pretty to those of us who were dealt a bad hand in the looks department. But don't rush off to try out for the next round of "Extreme Makeover" just yet. Despite what the research says, some of the world's most successful people have been ordinary looking at best, and you would never mistake the faces in Fortune for those in Esquire or Entertainment Weekly. Business legends are often of average height (Bill Gates at 5 feet 9 inches) or even diminutive (Jack Welch, 5 feet 8 inches, and Ross Perot, 5 feet 7 inches). What's more, many folks who are lovely to look at complain that they lose out on jobs because people assume they are vacuous or lightweights.

According to Gordon Wainright, author of Teach Yourself Body Language, anyone can increase their attractiveness to others if they maintain good eye contact, act upbeat, dress well (with a dash of color to their wardrobe) and listen well. He also stresses the importance of posture and bearing and suggests that for one week you stand straight, tuck in your stomach, hold your head high and smile at those you meet.

The Von Restorff Effect

The tendency to recall an item that "stands out like a purple cow" more easily than other items in a group.

A phenomenon of memory in which radically different things are more easily recalled than ordinary things. Memorizing isn't simply a matter of repetition. Attention plays a role in organizing material in ways that influence its later recall. For example, in any given number of items to be learned, an item that is different from the rest in size, colour, or other basic characteristics will be more readily recalled, such as a word printed in differently coloured ink or hi-lighted on a grocery list. 

This bias is named after the German psychologist Hedwig von Restorff (1906–1962) who first reported it in 1933. Also known as The Isolation Effect.

The Omissions Bias

The tendency to judge harmful actions as worse, or less moral, than equally harmful inactions.

Sam, a tennis player, would be facing a tough opponent the next day in a decisive match. He knows his opponent is allergic to a food substance. Suppose Sam recommends the food containing the allergen to hurt his opponent’s performance, or the opponent himself orders the allergenic food, and Sam says nothing. Most people judge Sam’s action of recommending the allergenic food as being more immoral than Sam’s inaction of not informing the opponent of the allergenic substance. Which stance would you take?

The Neglect-of-Probability Bias

The tendency to marvel over coincidences and ignore probabilities .

Why does probability-neglect happen? It's partly a psychological thing; imagining something happening and how we would feel about it is easy, natural, intuitive, but thinking about probability is difficult, mathematical, unfamiliar. And it's also partly a media problem; we have much more news reporting now than we did, say, thirty years ago. There were no 24-hour news channels then, only a small number of TV channels, and no internet. The news machine is voracious, and so when there is an accident or a disaster or any sort of human tragedy, it is reported and analysed endlessly. This makes us think that events which are actually very rare happen frequently, and perversely, events which are relatively common are under-reported precisely because they're not news.

Quiz: What's the safest way to travel? How much safer do you think it is to travel by car than to walk? A bit? A lot? Is a train safer than a plane? The best numbers I could find were fatalities per billion passenger kilometres for 1999:

Mode of Travel 

Deaths Per Billion Passenger Km
 

 Air 0.02
Boat 0.3
Rail 0.9
Car 2.8
 Bicycle 41
Pedestrian 49
Motor cycle 112

BrainTip:  To become more rational, add some facts and figures to your thinking. Flip into objectivity and neutrality once in a while. Covet the truth about coincidences:

The Information-Binge Bias

The tendency to place too much attention on information, even when it's barely relevant.

People often think, "The more information I acquire to make a decision, the better." But often, seeking extra information is a flagrant waste of time and money. Curiosity and confusion lead us into information binges. And, with Google continually beckoning and rewarding us, the info-gathering habit is hard to break.

When you confront the brain with too much information, the quality of the decision tends to decline.

The Anchoring Effect

The tendency to "anchor" (rely too heavily) on one piece of information when making a decision. 

During normal decision-making, we often anchor, or overly rely, on specific information at the expense of other important information. We narrow our sights. Usually, once the anchor is set, there is a bias toward that information. Take, for example, my mom while shopping for a boat. She focused excessively on the pretty blue curtains of an older Chris-Craft and didn't think about how well the engine worked. She paid $30,000 for the vessel which sat in a slip for a year while a mechanic fiddled with the engine. A year later, she dumped the boat (because it needed a new engine) and muttered something like, "Boats are holes in the water where you throw money...and the happiest day of a boat owner's life is the day they buy the boat and the day they sell it." This bias is also known as "The Focusing Effect."

BrainTip: Try to see the grand view. Focusing on snippets can bust your health, wealth and love life. Don't obsess on extraneous details. Ask, "What's really important here?"

The Impact Bias

The tendency for people to overestimate the duration or intensity of their future feelings.

It's not going to be as bad—or as fab!—as you might imagine, so relax. In other words, people seem to think that if disaster strikes, it will take longer to recover emotionally than it actually does. Conversely, if a happy event occurs, people overestimate how long they will feel elated, thrilled, and titillated.

BrainTip: Enjoy the emotional highs and let go of your painful stories about the lows. Go to TheWork.org for assistance with this task. Look for Katie's four-question inquiry for busting our stressful, upsetting thoughts.

The Look-Alikes Bias

The tendency for people to cozy up to people who look like themselves and pick on those who don't.

We migrate toward people who remind us of ourselves. We perch with look-alikes because we feel comfortable and validated when other folks share our physical appearance—nose shape, coloring, height, taste in clothes—as well as our opinions. Have you ever noticed that most couples look like brother and sister?  Few people have made this observation yet it's so in-our-faces.

"From the little we do know, we can say that good people (we, us) are capable of incredible harm to others and even themselves. That daily moral decisions we make are not based on the principles of justice that we think they are, but are often a result of the familiarity and similarity of the other to oneself. These two simple types of bias happen because the mind and its workings remain invisible to us and until we unmask it meanderings, the disparity between what we do and what we think we do will remain murky," says MAHZARIN R. BANAJI, Professor of Social Ethics, Department of Psychology, Harvard University

The Denial Bias

The tendency to discount or disbelieve an important and uncomfortable fact.

When faced with a fact that's uncomfortable to accept, this bias says, " Reject it! It's not true despite overwhelming evidence." The subject may deny the reality of the unpleasant fact (simple denial), admit the fact but deny its seriousness (minimization), or admit both the fact and seriousness but deny responsibility (transference). Denial is a generic defense mechanism. 

Denial of Fact
Avoiding a fact by lying. Lying can take the form of an outright falsehood (commission), leaving out certain details to tailor a story (omission), or by falsely agreeing to something (assent). Someone who is in denial of fact is typically using lies to avoid facts they think may be painful to themselves or others.

Denial of Responsibility
Avoiding personal responsibility by blaming, minimizing or justifying. Blaming is a direct statement shifting culpability. Minimizing is an attempt to make the effects of an action seem less harmful than they are. Justifying presents reasons why someone is right. Denial of responsibility is a ploy to avoid potential harm or pain by shifting attention away from oneself.

Denial of Impact
Avoiding thinking about or understanding the harms one's behavior has caused to themselves or others. By doing this, the person is able to avoid feeling a sense of guilt and it can prevent that person from developing remorse or empathy for others. Denial of impact reduces or eliminates a sense of pain or harm from poor decisions.

Denial of Awareness
Avoiding pain and harm by stating he/she was in a different state of awareness (such as alcohol or drug intoxication or on occasion mental health related). This type of denial often overlaps with denial of responsibility.

Denial of Cycle
Avoiding looking at one's decisions leading up to an event or not considering one's pattern of decision-making and how harmful behavior is repeated. The pain and harm being avoided by this type of denial is more of the effort needed to change the focus from a singular event to looking at preceding events. Many who use this type of denial say things such as, "It just happened."

Denial of Denial
Denial of denial involves thoughts, actions and behaviors which bolster confidence that nothing needs to be changed in one's personal behavior. This form of denial typically overlaps with all of the other forms of denial, but involves more self-delusion.

BrainTip:  When you're in denial, ask yourself, "Is it true that denying the facts is less painful in the long run? How does denial make me feel? And how would I feel if I faced, and heartily embraced, the truth?"

The Déformation Professionnelle Bias

The tendency to look at things from the point of view of your profession and forget a broader perspective.

A French phrase, Déformation Professionnelle, is a pun on the expression "formation professionnelle," meaning "professional training." The implication is that all (or most) professional training results to some extent in a distortion of the way the professional views the world. "When the only tool you have is a hammer, every problem looks like a nail," is an adage describing this phenomenon.

The Endowment Effect

The tendency to demand much more to give up an object than you would be willing to pay to acquire it.

In one experiment, people demanded a higher price for a coffee mug that had been given to them, but put a lower price on one they did not yet own. People value a good or service more once their property right to it has been established. In other words, people place a higher value on objects they own than objects that they don't. The endowment effect was described as inconsistent with standard economic theory which states that a person's willingness to pay for a good should be equal to their willingness to accept compensation to be deprived of the good.

This is from Jonah Lehrer 's blog, The Frontal Cortex:

JUNE 22, 2009

I went jean shopping this weekend. Actually, I went to the mall to return a t-shirt but ended buying a pair of expensive denim pants. What happened? I made the mistake of entering the fitting room. And then the endowment effect hijacked my brain. Let me explain.

The endowment effect is a well studied by-product of loss aversion, which is the fact that losing something hurts a disproportionate amount. (In other words, a loss hurts more than a gain feels good.) First diagnosed by Richard Thaler and Daniel Kahneman, the endowment effect stipulates that once people own something - they have an established or imagined "property right" to the object - that something dramatically increases in subjective value.Wikipedia has an excellent summary of an experiment documenting the endowment effect by Dan Ariely and Ziv Carmon:

Duke University has a very small basketball stadium and the number of available tickets is much smaller than the number of people who want them, so the university has developed a complicated selection process for these tickets that is now a tradition. Roughly one week before a game, fans begin pitching tents in the grass in front of the stadium. At random intervals a university official sounds an air-horn which requires that the fans check in with the basketball authority. Anyone who doesn't check in within five minutes is cut from the waiting list. At certain more important games, even those who remain on the list until the bitter end aren't guaranteed a ticket, only an entry in a raffle in which they may or may not receive a ticket. After a final four game, Carmon and Ariely called all the students on the list who had been in the raffle. Posing as ticket scalpers, they probed those who had not won a ticket for the highest amount they would pay to buy one and received an average answer of $170. When they probed the students who had won a ticket for the lowest amount they would sell, they received an average of about $2,400. This showed that students who had won the tickets placed a value on the same tickets roughly fourteen times as high as those who had not won the tickets.

What does this have to do with fitting rooms and jeans? Once I tried on the pants, I became an implicit owner of them. I stared at myself in the mirror and admired the fit, the wash, etc. I thought about how good they would look with my shoes. I contemplated wearing them to various upcoming events and all the strangers who would look at my pants and think "Those are nice pants!" In other words, I spent a few minutes imagining my life with these new jeans and, once that happened, the pants suddenly became much more valuable. I mentally endowed myself with the object and didn't want to lose something that I didn't even own. As a result, the ridiculous price tag ($170 for Levis!) no longer seemed so ridiculous. The lesson? Don't try something on that you don't want to buy.

Update: Via a reader (thanks Alon!) comes this study, which demonstrates that merely touching an item can trigger the endowment effect.

The Conservatism Bias

The tendency for investors to react too slowly to changes in the market.

This is the tendency to cling tenaciously to a view or a forecast. Once a position has been stated most people find it very hard to move away from that view even when they are presented with new data. When movement does occur it is only very slow which creates under-reaction to events. This slowness to revise prior probability estimates is known as “conservatism.”

The Distinction Bias

The tendency to view two options as more dissimilar when evaluating them together than separately.

Understanding the differences between joint evaluation and separate evaluation is important because we often make decisions by comparing options—but we typically experience options in isolation. This creates a mismatch in which the best decision may not provide the best experience. For example, when televisions are displayed next to each other on the sales floor, the difference in quality between two very similar, high-quality televisions may appear great. A consumer may pay a much higher price for the higher-quality television, even though the difference in quality is imperceptible when the televisions are viewed in isolation. Because the consumer will likely be watching only one television at a time, the lower-cost television would have provided a similar-quality viewing at a lower cost.

The Instant-Gratification Bias

The tendency to minimize the future and cave in to short-term highs.

Over millions of years, evolution selected strongly for creatures that lived largely in the moment. In every species that's ever been studied, animals tend to value the present far more than the future. And the closer temptation is, the harder it is to resist. When we're hungry, we gobble french fries as if driven to lard up on carbs and fat now, since we might not find any next week. Obesity is chronic not just because we routinely under-exercise, but also because our brain hasn't caught up with the relative cushiness of modern life. We continue to downplay the future hugely, even as we live in a world of all-night grocery stores and 24/7 pizza delivery.

Future-bashing extends way beyond food. It affects how we spend money, why we fail to save enough for retirement, and why we so frequently rack up enormous credit card debt. One dollar now seems more valuable than $1.20 a year from now. Doctors find that many people who've had heart bypass surgery don't take all the measures they recommend to significantly reduce the odds of future cardiac complications. The allure of that juicy pepperoni pizza now is too much to overcome against the distant benefit of living longer. So the more we minimize the future, the more we go for drugs, booze, and gluttony.

GOOGLE IT: This bias is also called “The Hyperbolic Discounting Curve.” The curve gets steeper and steeper as the reward date is pushed further out into the future. This makes it hard for people to make the right choices today for goodies that are years away.

The Base-Rate Bias

The tendency to ignore statistics and focus on the particulars.

Charts and numbers bore and intimidate most of us. We're data phobic, prefer the warm fuzzies of the human touch and testimonials to hard facts. The word "probability" makes us squeamish, feel dumb. Nonetheless, we need to know that when judging a situation―for instance, diagnosing a patient's disease―there are two often types of information:

Type #1  Data about the frequency of the disease occurring in a large population.
Type #2  Specific information about the patient: results of tests and an examination.

When people have both types of information, they tend to make judgments based entirely upon Type 2 information, leaving out the statistics. It's best to consider both types of information because there is always some possibility that an observation or test may be wrong. 

Source: Amos Tversky & Daniel Kahneman, "Evidential Impact of Base Rates", in Judgment Under Uncertainty: Heuristics and Biases, Kahneman, Paul Slovic, and Tversky, editors (1985), pp. 153-160.

The Illusion-of-Control Bias

The tendency to believe we can control outcomes we clearly cannot.

One simple form of this fallacy is found in casinos: when rolling dice in craps, it has been shown that people tend to throw harder for high numbers and softer for low numbers. Under some circumstances, experimental subjects have been induced to believe that they could affect the outcome of a purely random coin toss. Subjects who guessed a series of coin tosses more successfully began to believe that they were actually better guessers, and believed that their guessing performance would be less accurate if they were distracted.

The Ostrich Effect

The tendency to ignore an obvious risky situation by pretending it doesn't exist.

Have you ever been told, "You've got your head in the sand?" I have. I've ignored many obvious, negative situations. The name of this bias comes from the legend that ostriches bury their heads in the sand to avoid danger. In behavioral finance, the ostrich effect is the avoidance of apparently risky financial situations by pretending they don't exist.

The Better-Than-Average Bias

The tendency to think we're better-than-average at many things.

People generally consider themselves smarter, luckier, better-looking and more important than they really are. They regard themselves as exceptional and believe they will avoid the divorces, premature deaths or weight gains that befall everyone else. The link between people’s personal estimations and the not-so-flattering reality is sometimes perilously weak. To social psychologists, flawed self-assessment is the norm. People systematically misjudge their abilities, virtues, importance and future actions. And those erroneous views can endanger health, ruin relationships, ruin finances and cause other miseries. 

The Familiarity Bias

The tendency to prefer things that are familiar.

Familiarity breeds liking. People tend to develop a preference for things merely because they are familiar with them. In studies of interpersonal attraction, the more often a person is seen by someone, the more pleasing and likeable that person appears to be. The earliest known research on the exposure effect was conducted by Gustav Fechner in 1876. Edward B. Titchener also documented the effect and described the "glow of warmth" one feels when in the presence of something that is familiar.

Also called "The Mere Exposure Effect" and "The Propinquity Effect."

FAMILIARITY & YOUR MONEY
Tens of thousands of potential stock, bond, and mutual fund investments exist. So how do investors choose? Financial theory suggests we should analyze the expected return and risk of each investment. But no, investors tend to trade in the securities with which they are familiar. There is comfort in having your money invested in a business that is visible to you. This familiarity bias has a strong influence on what you buy.

Choosing investments is an exercise in decision-making under risk and uncertainty. Chip Heath and Amos Tversky show in a series of experiments that when people are faced with a choice between two gambles, they will pick the one that is more familiar to them. In fact, they will sometimes pick the more familiar gamble even if the odds of winning are lower! Gur Huberman argues that "Familiarity is associated with a general sense of comfort with the known and discomfort with-even distaste for and fear of-the alien and distant." For example, when given a list of countries and asked to rank order the performance of the economy or stock market in those countries, people rank their home country's performance better.

This sentiment can also be expressed in the form of affect, a belief that investment alternatives that are more familiar are better than those that are not. In this case, "better" usually means that they have higher expected return and lower risk than unfamiliar ones.

How does this bias impact you as an investor? The main problem is that when you buy the familiar, you underestimate the amount of risk in the investment. Because you underestimate the risk, you do not take the purposeful steps of reducing risk, like diversifying. So you end up taking more risk than desired. Implications are:

• Inferior asset allocation
• Too much allocation to one or few stocks
• Preferences for local stocks (home bias)
• Preferences for cultural proximity
• Preferences for professional proximity


REFERENCES: See Heath, Chip, and Amos Tversky, 1991, "Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, 4, 5-28, and Huberman, Gur, 2001, "Familiarity Breeds Investment," Review of Financial Studies, 14, 659-680.

The Choice-Supportive Bias

The tendency to give positive qualities to an option we've chosen, simply because we've chosen it. 

We conger up reasons why we chose the right, smart and edgy thing, and why our other options were wrong, stupid and dated. It's easy to justify our choices because we're living with them, in our drawers, parked in our garages, and in bed next to us in a granny gown. They're in our face while our other options are relegated to the fringes of consciousness. In truth, every choice has an upside and a downside, nothing is 100-percent desirable or undesirable. So why are we so smug about our choices? For one thing, the minute we commit to them, they become a part of our identity, our self image. To know thyself, make a list of thy choices. 

The Optimism Bias

The tendency to view ourselves as invulnerable (or less likely than others) to experiencing negative life events.

This personal fable also involves the tendency to overestimate one’s probability of experiencing positive life events. Humans expect positive events in the future even when there is no evidence to support such expectations. It seems that optimism bias is part of a general bias towards thinking positive things or "The Pollyanna Principle."

EXAMPLES
• People expect to live longer and be healthier than average.
• People underestimate their likelihood of getting a divorce.
• People overestimate their prospects for success on the job market.
• People expect to complete personal projects in less time than it actually takes to complete them.
• Second-year MBA students were found to overestimate the number of job offers they would receive, the magnitude of their starting salary, and how early they would receive their first offer."
• Professional financial analysts were reasonably able to anticipate periods of growth and decline in corporate earnings, but consistently overestimated earnings realized.
• Vacationers anticipate greater enjoyment during upcoming trips than they actually expressed during their trips
• Newlyweds almost uniformly expect that their marriages will endure a lifetime" despite the large proportion of marriages that end in divorce.
• Most people expect they have a better-then-average chance of living long, healthy lives; being successfully employed and happily married; and avoiding a variety of unwanted experiences such as being robbed and assaulted, injured in an automobile accident, or experiencing health problems.
• Between 85% and 90% of respondents claim that their future will be better —more pleasant and less painful—than the future of an average peer"
• Most smokers believe they are less at risk of developing smoking-related diseases than others who smoke.
• People believe that they are less likely [than average] to be victims of auto accidents and earthquakes.
• People believe that they are less likely than others to fall prey to illness, depression and unwanted pregnancies.

The Wishful-Thinking Bias

The tendency to wish something to be true that's false, or vice versa.

We often interpret facts as we'd like them to be, not how they actually are. If I believe I can talk to Hazel, my beautiful, deceased grandmother, that's wishful-thinking. Lots of people subscribe to this fantasy. So what's the fact? The fact is there is no proof that I'm actually meeting with Hazel. No one can see her, except me, and I'm hallucinating or have a vivid imagination. A list of common wishful-thinking examples: seeing ghosts, believing there are gods, imagining eternal life, thinking the stock market will go up for another ten years, and so on. This bias is related to "The Tinkerbell Effect." If you wish hard enough for something to come true, this theory suggests you will get your wish.