Financial Literacy Behavioral Economics

University:
University of the People
Course:
BUS 2204 | Personal Finance
Academic year:

2022
Views:

428

Pages:

2
Author:

skarvurdld6

BEHAVIORAL ECONOMICS ● COGNITIVE BIAS ○ Cognitive bias is the tendency to act in an irrational way, due to our limited ability as humans to process information objectively. At their core, they are our brain’s attempt to be efficient and make decisions quickly - mental shortcuts. ● TYPES OF COGNITIVE BIASES ○ Confirmation Bias: The tendency to search for information that supports our preconceptions and to ignore or distort contradictory evidence. ○ Endowment Effect: The tendency to put more value on things you already own. ○ FOMO (Fear of Missing Out): The tendency to feel anxiety/fear that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on a social media website. ○ Hedonic Adaptation: The tendency to return to a baseline level of happiness regardless of whether you go through a positive or negative experience or event. ○ Herd Mentality: The tendency to conform to the behaviors and beliefs of the people around you. ○ Loss Aversion: The tendency to regard losses as considerably more important than gains of comparable magnitude. ○ Overconfidence Bias: The tendency people have to be more confident in their own abilities. ○ Overestimation: When a person believes that they are better at something than they actually are. ○ Overplacement: When a person mistakenly believes they are better than others. ○ Overprecision: When a person has an exaggerated certainty that an answer is correct. ○ Sunk Cost Fallacy: The tendency to make decisions about a current situation based on what resources you have already invested in the situation. ● STRATEGIES TO OVERCOME COGNITIVE BIASES ○ 1. Be aware - The first and MOST IMPORTANT tip to overcome these biases is to acknowledge that they exist. ○ 2. Consider current factors that may be influencing your decision. ○ 3. Reflect on the past. ○ 4. Be curious - Curiosity can stop us from assuming we are right. ○ 5. Strive for a growth mindset. ○ 6. Identify what makes you uncomfortable. ○ 7. Embrace the opposite. ○ 8. Seek multiple perspectives. ○ 9. Look for disconfirming evidence to counter your existing belief. ○ 10. Practice intellectual humility - “What am I missing here?”