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This is a separate page of the
C section of the Glossary
Behavioral finance FAQ / Glossary (Cognition - Cognitive)
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
See cognitive...asymmetry ...bias ...dissonance
...overload ...trap, neuroscience + bfdef2
Cognition, as you might know, ...is what you know.
Cognition, as you might think, ...is what you think.
Cognition is the stuff that fills your mind.
Definition:
Cognition is related to the intellect and to knowledge.
It is the mental process that uses perception, analysis, reasoning and memory.
It includes:
Perceiving (seeing, hearing, tasting, feeling...)
Learning (storing in the memory) and recalling.
Cognition and knowledge are near-synonyms.
Processing, sorting, interpreting (representation, belief)
and - more generally - thinking and producing ideas
and decisions - choices.
Cognition is thus a highly practical theme, not just a topic for academic talks.
Cognition can take wrong, even
disastrous, paths,
for example in
economic behavior.
like you, me and all other human beings
This glossary might help detect what cognitive gears are deficient
and need
repair,
Those deficiencies are called "cognitive biases" (see that phrase).
As they impact human decisions and actions they cause various
"behavioral biases" (see bias).
The mental duet: cognition and emotion
Duet or duel?
Usually, in mental processes, psychologists make, for practical purposes a distinction
between cognition and emotion (see that word), even if emotions have cognitivetraits and cognition emotional traits)
Neurosciences have found that those mental duettists:
Are located in different parts of the brain (*).
Each one has its own offices in the premises.
as if competing for leadership.
(*) The "cognitive" sector of the
brain, the cortex to oversimplify
things, might - or not - filter basic emotional impulses that come from other parts.Also neuronal connections can bridge different sectors
As a consequence of those traits, cognitive biases - which are commented below -
and emotional biases (commented in the "emotion" article) are often interrelated.
Straight or bent cognition.
A school of psychology (cognitive psychology) has made important research on
the cognitive process. It shows:
decisions that take into account realities,
cognitivebiases,
Those biases bring mental distortions of reality, erroneous perceptions we
would say, that lead to flawed decisions.
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed/ discussed, i: incidental
01/9i + see asymmetry
People are not equal, cognition-wise.
Definition: cognitive
individuals, for example between investors (see asymmetry).
memories or responses and neglect
others.
For example negative ones over positive ones, or the other way round.
00/8i,10i,11i - 01/2i,8i,9i - 02/7i,9i -
03/3i,11i - 04/1i,4i,8i - 07/12i - 08/1i
+ see cognitive dissonance - overload
- trap - asymmetry + bfdef2The mind might take the wrong road.
Definition: cognitive biases are mental phenomena that give a wrong perception of the
issues at stake.They usually get exacerbated in cases of
uncertainty, which are
rather frequent as well in human and social life as in economic and financial situations.
Those cognitive biases are linked to one or several of the factors below:
Bounded individual cognition
From collecting to understanding and then recalling,
a long chain of pitfalls
identification and gathering (see lack of
attention, cognitive overload...),
of such information,
(see framing, representativeness, cognitive dissonance, cultural bias,
unfounded beliefs...),
probable evolutions of the state of things (see information processing,
heuristic, logical fallacy, small numbers, gambler's fallacy, halo effect,
range estimate, story, scenario),
knowledge), and failures in the memory process in general.
Also the failure to "de-learn" wrong or obsolete knowledge / beliefs
that distort decisions.
Not to forget:
Emotional biases (see emotion).
Although they can be considered as a category of biases in themselves,
emotional biases play a part in cognitive distortions.For example, some cognitive biases are the effect of emotional default
of attention, when emotions take the leading role on cognition.
Social factors (see social), among them cultural factors
(see culture,learning, consensus...) and emotional factors (herding...),
They obviously influence also personal cognition.
Money blunders
Cognitive biases are one of the two main sources - together with emotional biases -
of erroneous
economic / financial decisions.
Such biases, when they spread to the bulk of economic players,
can cause important anomalies:
Prices and returns depend on how investors perceive information.
=> This creates wrong valuations and
Cognitive flaws can empty your purse!
evolutions.=> Then anomalies in market prices and returns strike!
Cognitive flaws can make markets wild!
phenomena (inflation, economic development, business cycles...),
play on mental biases.
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed, i: incidental
00/6i - 02/9i - 03/11i + see selective perception,
denial, conservatism status quo bias, confirmatory
bias, selection bias + bfdef2Closing the door to alien thoughts and facts,
and staying with our beliefs in our grotto.
Cognitive dissonance is a common mental process in which people feel uncomfortable
when facing new
facts and
situations that are contrary to:
(cognitive dissonance is sometimes called also "belief persistence"),
(here some emotional aspects might intermingle with purely cognitive ones)
Facts or beliefs? Adjust or reject? But adjust how?
When facing that situation, people can have two different reactions:
adjust their
beliefs to the facts (cognitive consonance),
reject, consciously or unconsciously
those new facts (a phenomenon that can be called a cognitive
dissonance "bias" or a "denial").
In that later case, the person:
(confirmatory bias, selection bias) instead of those that contradict it,
consonance, here again) but in a biased way.
For example, it might invent an explanation that avoids to feel pain and
that fits its expectation more than reality (see attribution,
rationalization, wishful thinking...)This bias can disappear suddenly when the shock due to new events is so strong
that it cannot be ignored anymore.
In money management, cognitive dissonance can lead to a "status quo bias" (see
that phrase) for investors who do not accept what has changed in the market situation.
03/12i + see manipulation,
neurosemantics, logical fallacies,
deception, propaganda, spinTinkering with people's minds.
Cognitive
manipulation is making other people believe some - often
dubious - things (for example that a stock is worth buying) by using perverse cognitive
techniques.
One form is, of course, to state plain lies (disinformation).
But others are subtler conjurer tricks:
and other speech effects (rhetoric, but also intonations...),
until it seems like a truth,
the issue.This is distinct from emotional manipulation (playing on sentiments).
But manipulators and propagandists usually combine the two sets of techniques.
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed/ discussed, i: incidental
00/8i,9i - 01/3i + see (limited or
availability) heuristic + bfdef2Drowned in the knowledge pool.
Definition:
Cognitive overload / information overload is the mental inability
to gather and handle too many information, in other words the equivalent
of the mental difficulty to "walk and chew gum at the same time".
Following the first scent.
As it leads to "filter" the
information flood, often in a purely instinctive way,
cognitive overload is, together with lack of attention, anchoring and rationalizing), one
of the causes that make investors:
Picking the best apples, or those that look so.
Situations of cognitive overload tend to spread nowadays. Information is more and
more present:
communication technologies,
complex and
changing.
We are nowadays better informed, but have
problems to sort the gems from the thrash,
and also to understand the whole picture.
The overload can affect individual people but also many professions in which information
is king, among them managers, economists, lawyers, scientists, politicians...A countermeasure might be "rational ignorance" (see ignorance).
This is screening information and knowledge with rational criteria,
neglecting areas where they are not worth the cost and effort.
See cognition
See anchoring, certainty effect, illusion,
overconfidence, illusion, fallacy, lack of
attention, availability / limited heuristicsBeing convinced that we know and understand
what we don't know and don't understand.
A cognitive trap is most of the time a form of illusion of knowledge (see that phrase),
a belief or representation that does not fit realities and that can bring wrong decisions
(that could bring for example
money losses, or worse...).
Who has the most chance to be struck by the illusion?
Some people are more prone than others to it.
This is the case of those who are overconfident / anchored in their own knowledge.
They might not bother to check, before deciding and acting, if that knowledge
is not
outdated,
insufficient, wrong, irrelevant or misleading.
And do not feel immune (which would be ...overconfidence)! That illusion can affect
anybody, some traps / fallacies are quite common (for example the base rate fallacy).
Social influence can be at work here with biased common knowledge, paradigms
or urban legends.
