Behavioral bias

Irrational decisions and behaviors

This article explains, sorts and synthesizes the main categories of
behavioral biases.
In short, they are blunders, erroneous actions, resting on not fully
rational decisions.
Such biases can be cognitive, emotional or reflexive.
They are either individual or collective.

How to miss the target and hit one's foot.

Behavioral biases are wrong and potentially damaging behaviors
caused by
error erroneous decisions (or unfit reactions) - blunders
to use a more explicit word.
Unless luck (or serendipity, or some corrective actions) saves the day
they bring usually suboptimal - and often negative / harmful - outcomes.

Well, that definition might be a bit too strict and reflect a too
of what is a rational behavior (see the next chapter).

=> Some biases, for example optimism / hope, work against us
in some situations but in other ones they help find solutions 
even to have a more positive life.

=> Some practices go against our self-interest. But among them
some might match other, quite respectable, needs or goals.
        They are biased in this respect but cannot be called blunders.

What is the cause?
The outside world or us?
Of course uncertainty and complexity make that nobody can make the
right move in 100% of the situations it meets. It can just hope to reach a
satisfying average.

But let us not be satisfy with just a justification resting on the perversity
of  things. 
brain  danger Mental peril ahead !
Another set of factors that trigger
defective actions rests on
not fully rational mental processes. 

Behavioral biases are studied as a set of phenomena often called
"bounded rationality" (a phrase that was coined by Herbert Simon).
What intervene are

* Individualflaws
cognitive, 2) emotional or 3) reflexive

* as well as 4) collective contagions.

Each of those factors bring mistakes. For big mistakes, better combine
all of them!

article describes them.

About rationality

Irrationality or bounded rationality is a rather common human trait
that cannot be totally avoided.

It would even be irrational to expect full rationality in human thinking
and behavior!

But it is far from easy to define rationality.
All the more if I ask you if you are rational.
There is a good chance you will kick me out.

Anyway let us try a practical definition:
Rationality is a consistency between our decisions, our
goals, our capabilities and the situation,
which gives the
best chances to get optimal outcomes.

Needless to say, it is not easy to juggle with four balls of different
shapes and
weights that tend to diverge all the time.

Like in many areas of nature or society, in which nothing
is 0% or 100% true,  sorry Aristotle, let us talk about
 gradual "degrees" or rationality / irrationality.

The limited rationality phenomenon can be detailed as a series of
various cognitive, emotional and reflexive biases (see below
various examples related to those three categories) that might
  • Memory flaws / errors in judgments
  • Maladjusted                         attitudes,
  • Poor                                       decisions,
  • Inefficient                             behaviors.

Rationality and society

Individual and social psychology shows how the human mind
is influenced in many ways.
You are not alone!

The main influences, and even dependencies, to which individuals
are submitted, come from, OK, this is not unexpected, groups and
populations they are related to.

Whatever is said about "common sense", and the need to interrelate
positively with other beings, starting with the closest at hand, not all
those influences favor rationality.
On the contrary, some collective traps cause irrational moves.
Although "free will" exists, it is not absolute, social pressure can
override it, for good or bad!

Behavioral biases categories and examples

Pick and choose! Behavioral biases can be

yinyang cognitive or    yinyang emotional,
yinyang individual or yinyang collective,
yinyang conscious or   yinyang automatic...

For a perfect blunder, combine several of them!

A. Cognitive biases

Here flawed reasoning and knowledge knowledge are involved.
Those cognitive distortions might be individual or collective

1) Individual cognitive biases.

The main ones are:
without reliable clues.
  • Decaying memory. Yes, time can distort it, or make it fade.
  • Beliefs, pseudo-certainty, illusions, cognitive dissonance
-> (bypassing factual or logical information that contradict
our beliefs).
  • Framing (selecting only one factor or opinion)
and reductive / bounded / binary / myopic thinking
  • Logical fallacies, contradictions,
reasoning confusions, halo, non transitive

OK, contradictions or loony ideas are sometimes a basis for
, but they should be clearly identified as such and
used moderately.

(mental routines or short perceptions used blindly to interpret
events or situations, without digging further)

-> representativeness, availability heuristic,
     selection bias, framing,
  • Unadapted goals/ intents or time horizons.

2) group Collective cognitive biases.

Here we have:
  • In general, a dependency on social learning
and on social codes / common conventions /
knowledge / practices,
without looking closely
whether they are relevant to the situations and to
our goals.
  • In specific cases, a tendency to think that other people
->"know better" and therefore to aping mimic without
     precaution what they do (information cascade, bandwagon
     effect...). Beware not to be  the slave of other people minds!

B. Emotional biases

What are involved here are:
  • Feelings: mental pain pain or pleasure pleasure
(they are even felt physically, in heartbeats for example),
  • The related emotional attitudes:
* either in existing situations : liking or aversion,
* or anticipated : hope (optimism, greed) or fear...

Emotions are forms of energy.

Energy can be constructive or destructive.
Excessive energy can blow our fuses
  • Whatever the automaticity of some of their behaviors
(see below "autopilot"),
human beings are not just cold mechanical beings.
Emotions are usually needed to drive human
A lack of emotion kills the desire to act.
  • On the other hand too strong emotions
that express excessive pain or elation
They can overwhelm rational thinking and wisdom,
entail occasional (or in some cases permanent) losses of IQ.

Neuroscience research
has shown a "primacy of emotions".
Various findings have shown that in many situations, including in those
that involve money-related decisions,  emotions tend to override
logical reasoning.

Brain areas and inner chemical secretions associated to pain and
pleasure tend to take the upper hand over those that help to
cool down,
to recover some lost IQ so as to perform dispassionate

Like cognitive biases, emotional biases can be either
personindividual or
group collective.

1) Individual emotional biases.

Let us mention:
-> This could lead to a preference to procrastinate,
     or to rally the default solution.

2) Collective or interpersonal emotional biases.

We have here:
  • Mimicry, herding and its various forms...
  • Social sentiment and mood.
Deciding according to a pleasant or unpleasant feeling,
a liking or dislike, towards a person, an organization,
but also a being or thing.

Attraction / repulsion, trust / distrust are often related
to this.  Madoff's clients liked the guy!

C. Autopilot or reflexive biases

Here we have robot automaticity biases in which cognition and
emotion are bypassed
by pure and mostly instinctive / unconscious
reflexes and habits
or even addictions
Heuristics, as seen above, usually call for some conscious
thinking, but can also become semi-conscious habits / ruts
that drive people's actions.

They are at the border between cognitive and emotional
biases on one side and
automatisms on the other, as forms
lazy thinking
/mental shortcuts to analyse situations
and make decisions
on the basis of superficial impressions
or feelings, shallow memories or anchored habits

  • Delaying, passivity, inertia, status quo bias,
also, choosing the default solution.
  • On the contrary, knee-jerk reflexes, hyperactivity
and (for market traders) noise trading...
  • Sudden "intuitions", either bright or irrelevant,
Yes our neurons work all the time, even when we do not
think consciously

  • Compulsions, and even addictions, as near-inescapable habits.

Source and further readings

Find more details on those biases in the
Behavioral finance glossary

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M.a.j. / updated : 31  July 2015
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