You often have choices. Choices that appear reasonably beneficial may sometimes lead to adverse consequences. The human tendency to choose suboptimal paths is puzzling. Why are so many of your thoughts self-defeating? Often times, cognitive biases or subtle mental frameworks you’ve been programmed to use distort your decision-making, leading to poorer health or increased wealth. It leads you to the pitfalls of getting little or nothing.
Cognitive biases in decision making
Cognitive biases are pervasive and often lead us down a path of error and misjudgment, unknowingly affecting our wealth and health. They act as filters through which we observe and interpret the world, creating subjective realities far removed from objective truth.
When it comes to finance, cognitive biases can distort our perception of value, risk, and reward, leading to poor financial decisions. For example, when we waste money or invest in an unprofitable business, our minds may think we are getting a good deal. Similarly, we may misjudge the risks associated with certain financial decisions, leading to losses that could have been avoided had we had a more accurate understanding of the situation.
When it comes to health, cognitive biases can affect how we view our bodies, our lifestyles, and the consequences of our actions. These can lead to underestimating the impact of unhealthy behaviors such as poor diet and lack of exercise on our overall health. This can lead to the development of chronic diseases, decreased overall well-being, and potentially reduced life expectancy.
Furthermore, cognitive biases can distort perceptions of medical advice and health information, ignoring the importance of preventative measures and necessary treatments. This can have a significant impact on our health, ignoring a condition that could be effectively managed if addressed early.
Cognitive biases can distort our thinking, lead to suboptimal decision-making, and lead to poor economic outcomes and poor health. The trick is to become aware of these inherent biases and learn how to avoid them in order to make more informed and rational choices. In doing so, you can avoid the pitfalls of misconceptions and promote better wealth and health in your life.
Cognitive biases are things we unconsciously use to trick ourselves into believing things to be true. They can be dangerous and destructive because they obscure our reality and the consequences of our thoughts and actions.
Let’s take a closer look at three cognitive biases that can make you poor and unhealthy. Knowing how to overcome them to be healthy and create wealth is essential.
First, we’ll look at prospect theory to understand how we sabotage our well-being and finances. This psychological model suggests that we have different values for gains and losses. When faced with risk, we avoid losses rather than gain more.
Prospect theory is often used in investing and has a significant impact on investor behavior.
Consider the case of an investor with a portfolio of stocks. Two scenarios may exist. One is a scenario in which the stock price rises significantly, and the other is a scenario in which the stock price falls.
According to prospect theory, investors are more likely to sell when stock prices rise. This is because the potential benefits are tangible and immediate. It’s a sure win that investors can count on.
On the other hand, if the stock price is falling, investors are more likely to hold on to the stock hoping it will recover. This decision is driven by a desire to avoid realizing losses even if the prospects for recovery are not high. This general phenomenon is “loss aversion” and is a key component of prospect theory.
In both cases, prospect theory may lead investors to make decisions that are not necessarily rational or profitable in the long run. For example, you may sell stocks that are gaining in value too quickly and miss out on future gains. Alternatively, you may hold falling stocks for too long and incur a larger loss than you need.
Understanding prospect theory provides valuable insight into investor behavior and helps individuals make more rational investment decisions in line with their long-term financial goals.
Prospect theory can have a significant impact on health decisions, primarily through loss aversion.
Think of someone who is thinking of starting a fitness plan. This person understands that regular exercise can significantly improve health in the long run, reduce the risk of chronic disease, lift mood, and boost energy levels.
However, immediate “losses” and costs, such as time, effort, potential muscle soreness, and gym memberships, may outweigh the long-term gains. Focusing on potential short-term downsides rather than long-term health benefits, the person says, “Out of the day he’s going to lose two hours” or “I feel tired and sore.” You may think,
Even if the benefits of a regular exercise routine far outweigh these temporary inconveniences, a person may choose to avoid immediate “losses”, leading to the decision to discontinue the exercise regimen.
This is a prime example of how prospect theory, which emphasizes loss aversion, can lead to poor health decisions. Recognizing this bias is the first step toward making more balanced decisions that prioritize long-term well-being over short-term discomfort.
A second candidate is consistency bias. Consistency bias is often a barrier to both financial success and improved health outcomes. This is a cognitive bias that causes us to remember past behaviors and attitudes as being more similar than current ones. This can create a distorted self-perception and hinder personal growth and development.
When it comes to wealth, the consistency bias makes us less likely to seek out new economic opportunities or change our financial habits. If you’ve always struggled to save money or made the wrong investment choices, you may be under the impression that you’re inherently bad at spending money. This perception can lead to a lack of willingness to seek personal finance, investments, and advice, leading to missed opportunities for wealth creation and financial security.
Consistency bias can also have adverse health effects. If you lead a sedentary lifestyle or have had unhealthy eating habits for many years, you may think that these are innate traits that you cannot change. You may think, “I never exercised,” or, “I like junk food too much.” These thoughts can prevent you from making healthier lifestyle changes.
Over time, this can lead to various health problems including obesity, heart disease, diabetes and other chronic diseases. Believing you can’t change can lead you to ignore the potential benefits of a healthier lifestyle, such as improved physical health, improved mental well-being, and longer life expectancy.
In both cases, consistency bias creates self-fulfilling prophecies of failure and stagnation, and can impede progress towards improved health and financial security. Overcoming this prejudice requires recognizing these distorted self-perceptions and opening ourselves up to the possibility of change and growth.
You’ve never been good at sports, so assume that’s always been the case. This leads to self-fulfilling prophecies of not trying new physical activities and ignoring health and fitness.
From a wealth perspective, consistency bias can lead to economic ruts. Let’s say you were always short of money. If you believe that you are the type of person who does not understand investing, you will never pursue this path and your financial growth will remain stunted.
Consistency bias is having a fixed mindset. A growth mindset leads to success.
Bias to avoid discomfort
The final bias we explore is the instinctive bias to avoid discomfort. This dislike can undermine our wealth and health by preventing us from making decisions that may bring us discomfort in the short term but may be beneficial in the long term.
In health, avoidance of discomfort manifests itself as resistance to changing unhealthy habits. You may worry that temporary discomfort from exercise or the inability to eat a balanced diet can lead to long-term health problems.
From a wealth perspective, this prejudice can discourage unpleasant but potentially lucrative opportunities, such as asking for a raise or if you’ve never invested in the stock market before. This can lead to unsatisfactory financial situations.
The bias to avoid discomfort causes us to always choose the path of least resistance and avoid new things that require effort, learning, and growth. This cognitive bias keeps you stuck in your current habits and lifestyle. To change, improve, and grow, we must break through this stereotype of discomfort. With this prejudice, we sacrifice our future by staying in our current situation because of laziness.
- Prospect theory leads us to avoid losses rather than pursue profits, to protect losers and to lock in winners early. Also, neglect healthy habits because of the initial cost of time and effort.
- Consistency bias makes us think that our past behaviors are more consistent with our current behaviors, underestimating our growth potential and impacting our financial success and improved health. .
- The bias to avoid discomfort causes us to resist beneficial change through short-term suffering and effort, and miss out on opportunities to accumulate wealth and improve health.
Everyday decisions clouded by cognitive biases can silently erode your health and wealth. But by recognizing and understanding these prejudices, we can overcome them. That way, you can make decisions based on logical reasoning rather than biased intuition. Recognizing the hidden pitfalls in your thinking is the first step to recognizing your thinking errors. Second, take steps to fix the error and do something useful.