With 188 Cognitive Biases, How Do We Make Decisions?
Decision-making is a complicated process. It requires a lot of brain power and time to eventually take action. Hence that’s why humans can’t be 100% rational beings.
However, we have to make hundreds of decisions every day, from picking an outfit for wearing throughout the day to submitting tax forms. It’s impossible to take hours and hours to crack every single problem. There’s simply not enough of them.
So our brain simplifies things to accelerate our decision-making. Here’s how it works.
How The Brain Simplifies Decision-Making
We all face constant pressure to make choices. That happens every day, wherever you are buying groceries or searching for that unique bottle of Champagne to drink with your significant other.
Yet, in most cases, you will end up purchasing exactly the same stuff you usually go for. Why is that?
What you experience is a choice overload, a term coined by Alvin Toffler in his book “Future Shock.”
Toffler dived deep into the effects of “too much change in a too short timeframe” and derived a phenomenon of freedom of choice –
The more options you have, the more unfree you become.
In other words, a wide variety of possibilities are confusing. They push you into picking something safe, well-known, and, perhaps, tested. And these are the consequences of choice overload.
Furthermore, a study conducted by Miller in 1956 found that adults can only decide between 5 to 9 products of similar characteristics.
So in case of more than 9 options, the brain has to come up with some kind of a “decision-making system” that could simplify things and make the overall thinking process quick. Sounds reasonable?
But this is what also makes us biased and prone to mistakes.
That’s a cognitive bias in a nutshell.
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Cognitive Bias & Investing
Cognitive biases are prevalent among traders and investors, which is no coincidence. You have to make decisions about where to put your money within a short time frame while relying on limited information.
Any data you possess will, by default, be limited simply because we don’t know everything. After all, the price surge of a certain stock today doesn’t mean it will continue reaching new highs tomorrow.
Take the crypto market as an example.
Volatility and uncertainty put tremendous pressure on coin prices, which is why players become victims of cognitive bias way more often than their counterparts in the stock market.
So you, as an investor, have to make your choice now and stick to it during whatever time period you have in mind.
Or, perhaps you prefer to take some time and think these decisions over, but the deeper you dive, the more irrational you become. Eventually, you either make a wrong choice, or don’t invest at all, a.k.a “the status quo” bias.
So in most cases, you will decide on the spot, thus relying on shortcuts that your brain created in order to make the whole decision-making process more manageable. These shortcuts are known as availability heuristics.
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The Availability Heuristic
In a nutshell, availability heuristics are the shortcuts we utilize to make decisions. These shortcuts are based on probabilities of something happening, which are derived from and connected to real-life examples that an individual hears about or stumbles upon.
Here’s a case. If you are a big fan of TV, you might have noticed that the news coverage now is overwhelmingly negative. You are getting bombarded with footage from war zones, points of unrest, and constant reports on economic instability.
Based on that, you can assume that we live in a very violent world with an unstable economy and unstoppable conflicts.
That would have been a reasonable assumption unless you take past data into perspective. This data shows that, in fact, the world has never been as peaceful as it is now.
Throughout the 20th century, two world wars took 100 million lives. Have we seen anything similar in the past 77 years? No. Hence that’s why a heuristic-based assumption can often be plain wrong.
Is there a way to circumvent or avoid the availability heuristic? Well, the availability heuristic is still cognitive bias, but we need to rely on it in our daily life.
Otherwise, we would spend hours picking a carton of milk.
At the same time, the availability heuristic prevents us from making well-thought-through investment decisions. Poor decisions are of course costly and worrisome.
At Libertify, we understood this, which is why we worked hard on an Automated Decision-Making Engine that eliminates biases, finally making investment decisions simple for humans.
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Automated Decision-Making Engine
Humans are irrational and often base their decisions on cognitive bias, which helps in daily life but drastically affects performance when it comes to investing. With Libertify, you can avoid making bad choices and become better at financial management.
In a nutshell, Libertify eliminates cognitive bias that prevents a clear, thought-through decision-making process by offering dynamically created investment recommendations 100% tailored to the user’s needs.
That way, our users take advantage of complex algorithms capable of tracking niche market trends working by their side, tackling the toughest of decisions for them.
Risk-Adjusted and Personalized
Simply put, risk adjustment is an investment strategy based on optimizing returns for a certain level of risk.
Unique to Libertify, risk adjustment investing is 100% personalized to the level of risk on an individual-by-individual basis.
With our platform, you can comfortably invest, knowing that your funds are under protection yet optimized according to the risks you are willing to take.
Think of “personalized risk-adjusted investing” as having a Guardian Angel, a servant of God, sent to protect your hard-earned capital.
It understands your personal situation and investment goals and only acts with your best interest in mind.
Automated Yet Full Control
In crypto, market regimes can change fast, often with varying degrees of velocity.
Any trade requires a decision and action, yet biases limit both. You have learned how our automated decision-making engine delivers personalized recommendations for you.
If the market suddenly goes up or down, the platform will send a mobile push notification describing the actions necessary to undertake.
This does not mean you have to agree. You can execute recommendations automatically or review custom-generated market data we provide to help you decide. You’ll always have complete control to stop the trade.
Every day, we make decisions ranging from easy guesses to complex choices, and every single time we encounter cognitive bias. These shortcuts are fine for simple tasks yet can push us in the wrong direction, especially in trading and investing.
When investing, we can achieve a much greater result and become better decision-makers by reducing cognitive biases and utilizing a risk adjustment strategy. So, next time you plan to invest, make sure to have Libertify by your side.