The influence of Cognitive biases on decision making process
Team member: Maréva Pautonnier, Mylène Zicry, Ermin Rejzovic, Pierre Picault, Wang Yushu, Zhu Yizhen
1. Introduction and definition
Cognitive biases are patterns of thinking whose goal is to acquire information by making experiences in according to an opinion or idea that we consider correct. Thinking of our experiences, we distinguish the perception, evaluation and logic interpretation mistakes. Cognitive biases were first identified by Amos Tversky and Daniel Kahneman. The variety of biases touches wide areas such as: memory, statistical reasoning and social attribution. Moreover, biases are common to all individuals but these biases may change in relation to the culture.
2. Different types and examples of cognitive biases
2.1 Different types of cognitive biases
There are different kinds of cognitive biases,such as:
-Action biases : Reflect excessive optimism, overconfidence or failure to integrate potential responses to your organization. -Interest biases : Self-serving recommendations or attachment to previous products or plans. -Pattern recognition biases : This includes confirmation bias, when individuals over-weight evidence favorable to their recommendation and disregard or under-value evidence that contradicts their opinions. -Stability biases : Such as aversion to loss or fear of change. -Social biases : Like for consensus or following the leader.
2.2 Popular examples of cognitive biases
We will now see different examples of cognitive biases:
-Bandwagon effect : The tendency to do like other because they think or believe like that. -Loss aversion : the tendency for people to prefer avoiding losses over acquiring gains. -Selective perception : the tendency for expectations to affect perception. -Anchoring : the tendency to rely too heavily on one trait or piece of information when making decisions
3. Influences of cognitive biases on decision making process
In the following parts we are going to analyze some famous example of cognitive biases. We are going to have a deeper look at how these cognitive biases can influence the decision making process.
3.1 Influence of Bandwagon effect on decision making
A psychological phenomenon whereby people do something primarily because other people are doing it, regardless of their own beliefs, which they may ignore or override. The bandwagon effect has wide implications, but is commonly seen in politics and consumer behavior. This phenomenon can also be seen during bull markets and the growth of asset bubbles.
This tendency of people to align their beliefs and behaviors with those of a group is also called "herd mentality."
For example, people might buy a new electronic item because of its popularity, regardless of whether they need it, can afford it, or even really want it. In politics, the bandwagon effect might cause citizens to vote for the person who appears to have more popular support because they want to belong to the majority.
3.2 Influence of loss aversion on decision making
In economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.Loss aversion was first demonstrated by Amos Tversky and Daniel Kahneman.
This leads to risk aversion when people evaluate an outcome comprising similar gains and losses; since people prefer avoiding losses to making gains. Loss aversion may also explain sunk cost effects.
Loss aversion implies that one who loses $100 will lose more satisfaction than another person will gain satisfaction from a $100 windfall. In marketing, the use of trial periods and rebates tries to take advantage of the buyer's tendency to value the good more after he incorporates it in the status quot.
Note that whether a transaction is framed as a loss or as a gain is very important...
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