You’re often making choices, aren’t you? Choices that seem reasonably beneficial sometimes lead to unfavorable outcomes. It’s puzzling, this human propensity to pick paths that aren’t optimal. Why are so many of your thoughts self-defeating? More often than not, cognitive biases and subtle mental frameworks you’re programmed to use skew decision-making, guiding you into pitfalls of poor health results and little or no attainment of wealth.
Cognitive Biases in Decision Making
Cognitive biases are pervasive, often leading us down paths of error and misjudgment, inadvertently contributing to detrimental consequences on our wealth and health. They act as filters through which we view and interpret the world, creating subjective realities that can be far removed from the objective truth.
Regarding finances, cognitive biases can distort our perception of value, risk, and reward, potentially leading to poor monetary decisions. For example, our minds can trick us into believing we are getting a good deal when overspending or investing in unprofitable ventures. Similarly, we might misjudge the risks associated with certain financial decisions, leading to losses that could have been avoided with a more accurate perception of the situation.
Regarding health, cognitive biases can affect how we view our bodies, lifestyles, and the consequences of our actions. They can lead us to underestimate the impact of unhealthy behaviors, such as poor diet or lack of exercise, on our overall health. This could result in the onset of chronic conditions, an overall decline in well-being, and, potentially, a reduction in life expectancy.
Additionally, cognitive biases can skew our perception of medical advice or health information, leading us to disregard the importance of preventive measures or necessary treatments. This can have significant implications on our health, causing us to neglect conditions that could be managed effectively if addressed early on.
Cognitive biases can warp our thinking, leading to suboptimal decisions, potentially causing poor financial outcomes and deteriorating health. The trick lies in becoming aware of these inherent biases and learning to navigate around them to make more informed, rational choices. By doing so, we can avoid the pitfalls of faulty thinking, promoting better wealth and health in our lives.
Cognitive biases are what we use subconsciously to trick ourselves into believing what we want to be true. They can be dangerous and destructive as they blind us to reality and the consequences of our thoughts and actions.
Let’s look deeper at three cognitive biases that can make you poor and unhealthy. Knowing how to overcome them to be healthy and create wealth is essential.
We first consider the prospect theory to grasp how we sabotage our well-being and finances. This psychological model implies that we value gains and losses differently. When faced with risk, we avoid losses instead of gaining more.
Prospect Theory often plays out in investing, significantly impacting investor behavior.
Let’s take the case of an investor with a portfolio of stocks. Two scenarios might present themselves: one where their stocks have appreciated considerably and another where their stocks have depreciated.
According to prospect theory, the investor is likelier to sell when the stocks have appreciated. This is because the potential gain is concrete and immediate; it’s a sure win that the investor can bank on.
On the other hand, when the stocks have depreciated, the investor is more likely to hold on, hoping the stocks will rebound. This decision is driven by the desire to avoid realizing a loss, even if the prospects of a rebound are not great. This common phenomenon is “loss aversion,” a key component of Prospect Theory.
In both cases, prospect theory might lead the investor to make decisions that are not necessarily rational or beneficial in the long term. For example, they may sell appreciating stocks too soon, missing out on future gains. Alternatively, they may hold on to depreciating stocks for too long, incurring more significant losses than necessary.
Understanding Prospect Theory can provide valuable insight into investor behavior, helping individuals make more rational investment decisions that align with their long-term financial goals.
Prospect Theory can significantly impact health decisions, mainly through loss aversion.
Consider an individual who’s contemplating starting a fitness regimen. This person understands that regular exercise would significantly improve their health in the long run – reducing the risk of chronic diseases, boosting mood, and increasing energy levels, among other benefits.
However, the immediate “losses” or costs – time, effort, potential muscle soreness, and gym membership expense – may feel heavier than the long-term gains. The individual might think, “I’m going to lose two hours of my day,” or “I’m going to be tired and sore,” focusing on the potential short-term negative aspects rather than the longer-term health benefits.
Even though the benefits of a regular exercise routine far outweigh these temporary inconveniences, the person may choose to avoid the immediate “losses,” leading to a decision to forgo the exercise regimen.
This is a prime example of how Prospect Theory, emphasizing loss aversion, can lead to poorer health decisions. Recognizing this bias can be the first step toward making more balanced decisions prioritizing long-term well-being over short-term discomfort.
Our second contender is consistency bias. Consistency bias can often act as a barrier to both financial success and health improvement. It’s a cognitive bias that causes us to remember our past behaviors and attitudes as more similar to our present ones than they are. This can create a distorted self-perception, hindering personal growth and development.
Regarding wealth, consistency bias can make you less likely to explore new financial opportunities or change your financial habits. If you’ve always struggled to save money or made poor investment choices, you might believe you’re inherently bad with money. This perception can discourage you from learning more about personal finance, investing, or seeking advice, leading to missed opportunities for wealth creation and financial security.
Consistency bias can also impact your health negatively. If you’ve led a sedentary lifestyle or had unhealthy eating habits for many years, you might view these as inherent traits you can’t change. You might think, “I’ve never been athletic,” or “I just love junk food too much,” these thoughts could prevent you from making healthier lifestyle changes.
Over time, this can lead to various health problems, including obesity, heart disease, diabetes, and other chronic conditions. By believing you can’t change, you may neglect the potential benefits of a healthier lifestyle, such as improved physical health, enhanced mental well-being, and a longer life expectancy.
In both cases, consistency bias can create a self-fulfilling prophecy of failure and stagnation, impeding your progress toward better health and financial stability. Overcoming this bias involves recognizing these distorted self-perceptions and opening yourself to the possibility of change and growth.
Suppose you’ve never been good at sports, so you assume that will always be true. This leads to a self-fulfilling prophecy where you don’t try new physical activities, neglecting your health and fitness.
From a wealth perspective, consistency bias can keep you in a financial rut. Let’s say you’ve always struggled with money. If you believe you’re not the type who can understand investments, you’ll never explore this avenue, keeping your financial growth stunted.
Consistency bias is having a fixed mindset. A growth mindset is what leads to success.
Bias to Avoid Discomfort
The final bias we’ll explore is our instinctive bias to avoid discomfort. This aversion can sabotage our wealth and health by preventing us from making decisions that may cause short-term discomfort but have long-term benefits.
In health, discomfort avoidance manifests as resistance to changing unhealthy habits. You might dread the temporary discomfort of exercise or the unfamiliarity of a balanced diet, which can lead to long-term health issues.
In terms of wealth, this bias could deter you from uncomfortable but potentially lucrative opportunities, like asking for a raise or investing in the stock market if you haven’t done it before. This can keep you stuck in an unsatisfying financial situation.
The bias to avoid discomfort will cause you always to take the easy path most traveled and avoid new things that require effort, learning, and growing. This cognitive bias keeps you stuck in your current habits and lifestyle. Changing, improving, and growing requires breaking this bias against discomfort. With this bias, you’re trading your future for staying in your present circumstances due to laziness.
- Prospect theory guides us to dodge losses more than we chase gains, leading us to hold on to losers and lock in winners early. Also, to neglect healthy habits due to the early costs of time and effort.
- Consistency bias makes us view our past behaviors as more in line with our current ones, causing underestimation of growth potential and impacting our financial success and health improvement.
- The bias to avoid discomfort makes us resist beneficial changes due to short-term suffering and effort, causing missed opportunities in wealth accumulation and health improvement.
Daily decisions clouded by cognitive biases can quietly erode your health and wealth. Yet awareness and understanding of these biases can arm you to overcome them. Your decisions can then be based on logical reasoning rather than biased instincts. Recognizing these hidden pitfalls in your thinking is the first step to becoming aware of these errors in thinking. The second is to take action to correct the error and do what’s beneficial.