The Cognitive Bias Handbook Part II
Curiosity Chronicle
How to Combat Loss Aversion
Loss aversion is hardwired into our primate brains, but as always, awareness is the first step to fighting back against its influence. The endowment effect says that once we have something, we don't want to give it up. So how do you combat it? Force a level of hyperawareness of the irrational gap between your WTA and your WTP on a possession.
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Today at a Glance
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes.
Combatting cognitive biases relies first and foremost on establishing a level of awareness of the biases, but each has its own specific combat strategies as well.
Overview, examples, and combat tactics for common biases, including Loss Aversion, Endowment Effect, Ben Franklin Effect, Availability Bias, Survivorship Bias, Ikea Effect, Hindsight Bias, Plan Continuation Bias, Gambler’s Fallacy, and Curse of Knowledge.
The Cognitive Bias Handbook - Part II
Cognitive biases are systemic errors in thinking that negatively impact decision-making quality and outcomes. I recently shared a Twitter thread covering the basics of 20 cognitive biases - but it was admittedly surface-level (280 characters only allows for so much depth and nuance on a topic!).
Last week, I went deeper, with Part I of The Cognitive Bias Handbook, covering 10 common cognitive biases, including examples and ways to combat each. Today, I will cover the remaining 10.
As a reminder, this two-part newsletter series was split as follows:
Part I (last week) covered Fundamental Attribution Error, Bandwagon Effect, Egocentric Bias, Naïve Realism, Baader-Meinhof Phenomenon, Pygmalion Effect, Confirmation Bias, Backfire Effect, Anchoring, and Dunning-Kruger Effect.
Part II (today) covers Loss Aversion, Endowment Effect, Ben Franklin Effect, Availability Bias, Survivorship Bias, Ikea Effect, Hindsight Bias, Plan Continuation Bias, Gambler’s Fallacy, and Curse of Knowledge.
This handbook is designed to be a resource you can save and come back to whenever you need a refresher. Given the volume and importance of the information, I am considering working with an illustrator to convert it into a physical/digital book that you can reference as well. Stay tuned!
Without further ado, let’s dive into Part II…
Loss Aversion
What is it?
The pain of losing something is more powerful than the pleasure of winning it.
Loss aversion was first identified by famed behavioral scientists Amos Tversky and Daniel Kahneman, who found that humans had a tendency to prefer avoiding losses over acquiring equivalent gains. Accordingly, people were typically willing to take actions to avoid losses that they wouldn’t have taken to seek gains.
Economists had previously assumed humans were rational actors - that $100 in losses would drive the same amount of pain as $100 in gains would create pleasure. Wrong. Humans are enigmatic creatures!
Examples
Investors - professional and amateur alike - exhibit loss aversion. The pain and fear of realizing a loss often leads investors to hold onto losing positions much longer than they should.
Gamblers who are in the red for a given night often risk much more to try to get back into the black (above breakeven) than they should.
How do you combat it?
Loss aversion is hardwired into our primate brains, but as always, awareness is the first step to fighting back against its influence.
Avoid emotional connection to your possessions - whether they are investments, material items, or money. Attempt to distance your emotions from the decision-making process where possible.
Ask questions:
Am I being objective and rational in this decision?
Am I letting my emotions influence my decision?
Am I too connected emotionally to make a rational decision?
If you are too connected to a given decision, you may need to outsource it to an objective third-party.
The Endowment Effect
What is it?
A close relative of loss aversion, the endowment effect (sometimes called “divestiture aversion”) says that once we have something, we don't want to give it up.
Specifically, we demand more to give up an object than we would be willing to pay to acquire it. In slightly more scientific terms, willingness to pay (“WTP”) to acquire an object is typically lower than willingness to accept (“WTA”) to give up an object.
Examples
In a classic experiment performed by Richard Thaler, two groups of people were placed in a room and given either (a) a fancy pen or (b) a coffee mug. They were then asked if they would be willing to trade their item for the alternate item. Both groups expressed an unwillingness to trade their endowed item for the alternate item, even though they had similar objective values.
In another study of NCAA Final Four ticket-holders, it was found that their WTA was ~10x+ higher than their WTP for the same tickets. Insane!
How do you combat it?
The path to fighting back against the endowment effect is, unsurprisingly, very similar to that of loss aversion.
Force a level of hyper-awareness of the irrational gap between your WTA and your WTP on a possession. Use your imagination to distance yourself from the possession and think objectively about its value and utility.
It’s never perfect, but it’s a start.
The Ben Franklin Effect
What is it?
"He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged." - Benjamin Franklin
Put simply, doing one favor for a person makes you more likely to do another favor for that person than if you had received a favor from them.
Humans love to reinforce our own self-perceptions. If we perform a favor for another person, we have become a “favor-giver” in our minds. We become more likely to reinforce this self-perception by performing another favor.
The Ben Franklin Effect says that this reinforcing effect is more powerful than the desire to return a favor when one has been done for you.
Examples
The best example of The Ben Franklin Effect is of how Ben Franklin’s eponymous effect was born.
Early in his career, Benjamin Franklin once sought to convert a political adversary into a fan. He did so by requesting a favor from the adversary (he asked for a book from his personal library). Flattered by the request, the adversary quickly obliged and loaned Franklin the book.
After he returned the book (with a nice thank you note!), Franklin noted that the adversary became a neutral supporter in all future interactions.
By drawing out a favor from the hater, he turned him into a fan (or at least a neutral bystander).
How do you combat it?
With the Ben Franklin Effect, rather than focusing on how to combat it, it is perhaps more impactful to think about the best ways to use it to your advantage in your own life.
As a brand or an individual, developing an awareness of this cognitive bias should allow you to think creatively about leveraging its power for converting haters into fans.
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