“Investment biases cause people to make irrational decisions based on sunk costs, rather than objective assessments of what is in their best interest.” — Michael Shermer
Investment and commitment biases are important concepts to understand when it comes to making informed decisions.
These biases can affect us in many different ways, from sticking to the status quo to justifying past choices.
In the following list, we will explore some of the most common investment and commitment biases, explaining each one in plain language and providing examples from everyday life.
What are Investment and Commitment Biases?
Investment and commitment biases are a type of cognitive bias that refers to our tendency to stick with a decision or course of action even when it is no longer in our best interest due to the investment we have already made.
We may become emotionally attached to our previous decisions and invest more time, money, and effort into them, leading us to continue with them even when they no longer make sense.
These biases can lead to poor decision-making and negative outcomes.
Investment and Commitment Biases
Here are some common investment and commitment biases:
- Anchoring bias: The tendency to rely too heavily on the first piece of information when making decisions.
- Blind spot bias: The belief that we are less biased than others, even when we exhibit the same biases.
- Confirmation bias: The tendency to seek out and interpret information in a way that confirms preexisting beliefs.
- Curse of knowledge bias: The inability to imagine what it’s like not to know something once we know it.
- Endowment effect: The tendency to overvalue things we own or have a personal attachment to.
- Escalation of commitment: The tendency to continue investing in a decision or course of action even when it’s no longer rational.
- Framing effect: The way in which information is presented can heavily influence decision-making.
- Gambler’s fallacy: The belief that past events will affect future outcomes, even when the events are unrelated.
- Groupthink: The tendency for a group to prioritize consensus and harmony over critical thinking and dissent.
- Halo effect: The tendency to overgeneralize from one positive trait of a person to assume they are generally positive.
- Hindsight bias: The belief that events were more predictable than they actually were after they have occurred.
- Hot hand fallacy: The belief that a person’s success in one area will translate to success in a different, unrelated area.
- Just-world bias: The belief that people get what they deserve and that the world is fair.
- Loss aversion bias: The tendency to feel losses more strongly than gains of equal value.
- Negativity bias: The tendency to focus more on negative information and experiences than positive ones.
- Overconfidence bias: The belief that one is more competent, skilled, or knowledgeable than they actually are.
- Post-purchase rationalization: The tendency to convince ourselves that we made the right decision after making a purchase or investment.
- Sunk cost fallacy: The tendency to continue investing in a decision or course of action based on the resources already invested, rather than considering future costs and benefits.
- Status quo bias: The tendency to prefer things to stay the same rather than change.
- Self-justification bias: The tendency to justify our decisions and actions even when they are irrational or harmful.
Know Your Investment and Commitment Biases to Think Better
Investment and commitment biases can lead us to make irrational decisions and stick to them even when they no longer serve us.
By being aware of these biases and actively working to overcome them, we can make more informed and rational decisions in both our personal and professional lives.
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