Irrationality & Decisions: How Cognitive Bias Affects Our Decision Making
Role of cognitive bias on our decision making and negotiations
Socrates defined Human as a rational animal. All the interactions we are having everyday, our decisions, negotiations, emotions, impulses, one poses this question whether humans are completely rational and how it affects us.
We will look at some of the cognitive biases which are unconscious and irrational brain processes that affect the decision making of ours. Understanding these will help us in daily life, marketing, negotiations, and to some extent to understand self.
1. The Framing Effect
People tend to respond differently to the same choice depending on how it is framed. Identical information can have positive or negative attraction based on the presentation.
We are more likely to buy yogurt labeled with 80 % fat-free than the one labeled with 20 % fat. We put a lot of value in moving from 90 percent to 100 percent than moving from 45 percent to 55 percent.
2. Prospect Theory and Loss Aversion
People assess their loss and gain perspectives in an asymmetric manner. We take unwarranted risks when the losses are uncertain but are more likely to act in a way to avoid a loss than to achieve an equal gain.
It has major role in financial decisions and marketing. We would not invest in risky stocks even though the potential reward can be high. All the subscription of free trial are based on the fear of missing out and more likely to continue.
3. Anchoring
People rely a lot on the first piece of information they learn.
It happens a lot while shopping, salary negotiations, buying cars or real estate. We get the feeling that any price below the first price is win. We end up buying items on limited edition, big discounts on items on sale.
These are a few of the Cognitive Bias which affects our decision making and on consciously understanding them, will lead us to better decision-maker and negotiator.
