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Tips on How 3 Thought Distortions Can Lead Us To Ruin

 

 

Cognitive bias, logical fallacies, and the science of critical thinking.

 

 

There is one big challenge that every strategist, life hacker,  investor, and entrepreneur faces. It is a similar challenge for any of us who wish to make effective, efficient, precise, accurate, productive, and self-aware decisions. This challenge is the human tendency to misapply things that seem rational or based on common sense that on closer investigation clearly are irrational. These irrational thinking patterns are called cognitive biases (CB).

 

Technically speaking, a cognitive bias is “a systematic pattern of deviation from norm or rationality in judgment. Individuals create their own ‘subjective reality’ from their perception of the input. With cognitive biases, an individual’s construction of reality, not the objective input, may dictate their behavior in the world. Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate judgment, illogical interpretation, or what is broadly called irrationality.

The 3 thought distortions that can ruin our lives and lead us to financial ruin are…

  1. perceptual distortion.
  2. inaccurate judgment.
  3. illogical interpretation (irrationality).

 

 

 

 

Although it may seem like such misperceptions would be aberrations, biases, when understood effectively, can help humans find commonalities and shortcuts to assist in the navigation of common situations in life, including certain investment strategies

Some cognitive biases are presumably adaptive. These may lead to more effective actions in a given context, such as commodities, international trade, and certain types of stock investments. Furthermore, allowing cognitive biases enables faster decisions which can be desirable when timeliness is more valuable than accuracy, as illustrated in heuristics. Other cognitive biases are a “by-product” of human processing limitations, resulting from a lack of appropriate mental mechanisms (bounded rationality), the impact of an individual’s constitution and biological state (see embodied cognition), or simply from a limited capacity for information processing.

 

“If there’s something you really want to believe, that’s what you should question the most.”
Penn Jillette

 

A continually evolving list of cognitive biases has been identified over the last six decades of research on human judgment and decision-making in cognitive science, social psychology, and behavioral economics, and HAGT (Harrison’s Applied Game Theory). I began keeping a list about a decade ago at it has reached 184 specific cognitive biases. Daniel Kahneman and Amos Tversky, pioneers in the study of these distorted ways of thinking, argue that cognitive biases are not necessarily negative and often have efficient practical implications for areas including clinical judgment, entrepreneurship, finance, and management. This is especially so when we are in a group attempting to solve a problem or make a decision collaboratively

Just to do a quick review: A cognitive bias is a systematic pattern of deviation from rationality or norm in judgment.

No one is immune to having cognitive biases, and investors, due to greed or a desire to go with the crowd are among the most vulnerable

Each of us creates our own “subjective reality” from our perception of the world (objective input). It is our individual construction of reality, not the objective input, that often dictates our thought, words, and deeds in the world.

 

 

 

 

The Takeaway:

If cognitive biases lead us astray it is because these biases, which are often emotional in origin, may lead to poor investment strategies due to:

  1. perceptual distortion.
  2. inaccurate judgment.
  3. illogical interpretation (irrationality).

The most EEPPASA (effective, efficient, precise, productive, accurate, and self-aware) individual knows from the get-go that no one can completely avoid these cognitive biases. Interestingly, since no human being is ever totally objective the EEPPASA decision-maker knows they use these biases to help themselves and others to find commonalities shortcuts, and life-hacks to assist in the navigation of common situations, problems, obstacles, and constraints in life. The individual who, through self-assessment understands where their own cognitive biases may come into play will be more skilled in creating innovative, tools, techniques, tactics, and strategies to not only survive but also to prosper.

 

 

 

About The Author: Lewis Harrison is a best-selling author, and skilled life hacker  who uses predictive analytics and applied game theory to isolate cost-effective solutions to all levels of business and social problems. His website is AskLewis.com. He can be reached by email at LewisCoaches@gmail.com. I will respond within 24-hours.

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