Cognitive Biases: The human brain is a remarkably complex organ, composed of roughly 100 billion neurons firing at a rate of about 200 times per second, resulting in an operating speed of about 20 trillion calculations per second. The brain is so complex, in fact, that it took researchers at the Okinawa Institute of Technology Graduate University in Japan and Forschungszentrum Jülich in Germany forty minutes and nearly 83,000 processors to simulate just one second of human brain activity.
As computer processing power continues to increase, it is only a matter of time before a more complete simulation of the human brain is possible. For the time being, however, it appears that each of us is born with a computer faster and more advanced than anything ever created by mankind; which makes it all the more puzzling that we continue to use an outdated operating system loaded with unnecessary software and riddled with defective or malicious code.
Cognitive biases are common patterns of erroneous thinking that lead us to perform illogical actions and make irrational decisions; glitches in our intellectual software arise from mental distraction, social influence, and emotional or moral motivations. Anthropologists and cognitive psychologists theorize that many of these biases evolved from the need to think and act quickly, particularly in situations where speed is more important than accuracy. But, although many cognitive biases may lead us to make decisions more efficiently in certain contexts, they often compel us to act in direct conflict with our own best interests; even when provided with the information needed to make better choices.
Cognitive biases influence the perception
Cognitive biases influence the way we perceive objective reality, relate to others, comprehend and use information, and make decisions. In the sixty years since psychologists and behavioral economists first started studying human judgment and cognition, a list of clinically observed cognitive biases has grown to include several hundred social biases, common errors of memory, and patterns of irrational decision-making; all of which influence our behavior in ways of which we are barely (if ever) perceptible.
In fact, two of the most common cognitive biases are the better-than-average effect (which compels individuals to overestimate their own positive traits while underestimating their negatives, but doing the exact opposite with others) and the self-serving bias (the tendency to reject or invalidate negative criticism, overlook personal faults, and focus primarily on strengths and achievements); both of which contribute to what cognitive scientists call the bias blind spot—a tendency to recognize impaired or irrational thinking only in others.
To understand just how much of our behavior is shaped by flawed mental processes, consider how some common cognitive biases influence consumer spending.
The Rhyme-as-Reason Effect (and related phenomena)
Similar to the Keats heuristic (the tendency to privilege a statement’s aesthetic qualities when evaluating its truthfulness or accuracy) and the fluency heuristic (in which statements that can be processed faster or more fluently are accepted as more plausible); the rhyme-as-reason effect refers to the tendency of individuals to perceive sayings or aphorisms as more truthful when they are written in rhyme. Although these biases may prove useful in mnemonics (e.g. I before E, except after C, or when it says A, as in ‘neighbor’ and ‘weigh’), they also serve as the basis for much of today’s advertising; in which a detailed account of a given product’s objective qualities is considerably less impactful than a memorable slogan or simple rhyme.
To make matters worse, as slogans are repeated with greater frequency in the public discourse, they tend to be perceived as more credible. Thus, advertisers make use of the availability cascade (according to which a statement becomes more authoritative through increased repetition), along with a host of other known cognitive biases to shape the public’s perception of the products they promote.
The Focusing Effect
Also referred to as ‘anchoring’, the focusing effect describes the tendency for individuals to rely too heavily on the first piece of information they receive when attempting to make informed decisions. Restaurants, for example, frequently include expensive items (for which profit margins are usually low) at the tops of their menus simply to compel customers to select a less expensive (but higher margin) item further down the page.
Similarly, car dealerships prominently display inflated sticker prices on their showroom models just to make customers more receptive to buying when the salesman offers a lower price. Any advertisement or sales brochure that compares a product’s sale price with its ‘regular price’ or ‘suggested retail value’ seeks to exploit the focusing effect by drawing their customers’ attention away from an item’s cost, and toward the amount of money they can ostensibly save.
The Restraint Bias
Commonly associated with addiction, restraint bias refers to an inflated sense of one’s own self-control. Individuals who overestimate their capacity for restraint while underestimating their impulsivity tend to place themselves in situations where they are exposed to temptation more frequently, usually without the awareness necessary to successfully control their impulses. The inability to accurately assess one’s self-control may facilitate destructive consumer habits, like impulse buying, by concealing the need for greater vigilance when temptations present themselves.
If you’ve ever struggled to persuade yourself through seemingly logical arguments of the benefits of a recent purchase, even after it has become clear that the expense was unnecessary or unwise, then you have demonstrated post-purchase rationalization, a variation on the choice-supportive bias, the tendency to look back on one’s choices as being better than they actually were. Consumers who demonstrate a choice-supportive bias typically refrain from returning purchases that prove unsuitable for their needs, choosing instead to rationalize their decision in an effort to preserve their self-esteem.
The Denomination Effect
Have you ever noticed that you tend to spend smaller bills faster than larger ones? Or that the $50 bill that you carried in your wallet for two or three weeks seemed to vanish overnight immediately after you broke it on a cup of coffee? In 2009, researchers from the University of Maryland conducted studies of common buying habits and found that individuals were considerably more likely to make unnecessary purchases with bills of smaller denominations than with an equivalent dollar amount in large bills.
According to the denomination effect, individuals tend to perceive a single $100 bill differently than five $20 bills, or ten $10 bills. One possible explanation for this bias is the culturally conditioned sense of self-esteem that comes from carrying larger denominations. The $100 bill, in other words, holds a psychological significance in excess of its face value, thus making it seem considerably (and irrationally) more valuable than one-hundred $1 bills. Accordingly, individuals who carry larger bills may be less likely to spend money on small, impulsive purchases than those who carry smaller bills.
Credit and debit cards, on the other hand, exert almost no psychological impact on those who use them. When you make an impulsive purchase with a $100 bill, you no longer have that bill; but you can make the same purchase on credit, and still keep your card. Since they hold little to none of the psychological significance that we attach to currency, credit cards encourage impulse spending by minimizing its emotional impact and concealing its actual cost.
It is only at the end of a billing cycle that we come to realize exactly how much money we’ve spent on petty indulgences and unplanned purchases; and, though we swear to never make the same mistake again, the rosy retrospection bias causes the momentary unpleasantness of statement shock to fade, and we invariably fall into the same bad habits and destructive spending patterns.