Econ Unit 1

How can external influences impact personal financial decisions?

Social and peer influence, media and advertising, cultural and societal norms, economic and government factors can impact how we view money and spending as a whole.

Identify several behavioral biases that can result in poor investment decisions or positive investment decisions.

Overconfidence, loss aversion, confirmation bias, herd mentality, recency bias

Identify steps for overcoming cognitive biases

Be aware, Consider current factors that may be influencing your decision,Reflect on the past, Be curious, Strive for a growth mindset, Identify what makes you uncomfortable,Embrace the opposite, seek multiple perspectives, Look for disconfirming evidence, Practice intellectual humility

Identify methods for avoiding negative consequences from behavioral biases

Set strict criteria ahead of time, Use checklists, Automate processes, Slow down your choices, Test your own reasoning, Practice mindfulness, Consult outside perspectives, Expose yourself to different views, Create accountability

Identify cognitive biases and the signs that they are influencing someone’s financial decisions

Clouding logical judgement

How can cognitive biases cause someone to make irrational decisions, especially around money?

Mental shortcuts, leads us to ignoring vital information leading to irrational decisions.

Anchoring Bias

a cognitive bias that causes us to rely heavily on the first piece of information we are given about a topic.

Availability Heuristic

our tendency to use information that comes to mind quickly and easily when making decisions about the future.

Bandwagon Effect

our habit of adopting certain behaviors or beliefs because many other people do the same.

Framing Effect

when our decisions are influenced by the way information is presented. Equivalent information can be more or less attractive depending on what features are highlighted.

Halo Effect

a cognitive bias that claims that positive impressions of people, brands, and products in one area positively influence our feelings in another area.

Mental Accounting

how we tend to assign subjective value to our money, usually in ways that violate basic economic principles.¹ Although money has consistent, objective value, the way we go about spending it is often subject to different rules, depending on how we earned the money, how we intend to use it, and how it makes us feel.

Optimism Bias

our tendency to overestimate our likelihood of experiencing positive events and underestimate our likelihood of experiencing negative events.

Hyperbolic Discounting

our inclination to choose immediate rewards over rewards that come later in the future, even when these immediate rewards are smaller.

Sunk Cost Fallacy

a tendency to continue a behavior because of previously invested resources

FOMO

Anxiety around the idea of missing out on interesting things

Loss Aversion

a cognitive bias where the emotional impact of a loss is felt more intensely than the joy of an equivalent gain.

Endowment Effect

how people tend to value items that they own more highly than they would if they did not belong to them. This means that sellers often try to charge more for an item than it would cost elsewhere.

Herd Mentality

Conforming to the beliefs and behaviors of the people around you/the bigger group of people, even if their beliefs don’t align with yours.

Confirmation Bias

our underlying tendency to notice, focus on, and give greater credence to evidence that aligns with our existing beliefs.

Overconfidence

when you hold a false idea about your level of talent, intellect, or skills. 

Hedonic Adaptation

the human tendency to quickly return to a stable baseline level of happiness after major positive or negative life events.

Overestimation

the tendency to inflate evaluations of one's own performance, skill, control, or chance of success beyond what is objectively real.

Overplacement

A cognitive bias and a form of overconfidence where a person falsely believes their skills, performance, or rank are superior to others