1. Read and analyze the case study critically and carefully! Revise the different behavioral biases/fallacies and the behavioral factors we learned about that could influence one’s decision to change the bulbs. Think about how they could be connected to the case! Know what the biases mean and be able to recognize their presence! 2. Assume that the data that the currently used CFL bulbs last exactly 4 more years for the Whelan family! Assume that the first energy costs will emerge in a year and that they remain constant in nominal terms! Consider that the inflation ratio will be 2% in each upcoming year! Should the Whelan family switch to the LED bulbs now based on the financial implications solely? Justify your decisions with appropriate capital budgeting methods! 3. Think about the trade-off between one’s own optimum and the social optimum! How would subsidizing the production/consumption or tax exemption of environmentally friendly goods make a difference in terms of prices and the supply and demand (graphs)?

The Ultimate List of Cognitive Biases: Why Humans Make Irrational Decisions

Cognitive biases describe the irrational errors of human decision making and they are a crucial part of understanding behavioral economics.

These scientific human biases affect the way we shop, invest and judge brands and people.

The revolutionary study of cognitive biases led Daniel Kahneman to win the Nobel Prize and opened the rapidly expanding field of behavioral economics.

By understanding cognitive biases, you will be able to read your customers’ minds better and design your product or marketing strategy accordingly.

In this list of cognitive biases, I try to explain the basic idea behind every bias in a plain non-academic language with simple examples.

Let’s begin…
What Are Cognitive Biases?

Cognitive biases describe the irrational errors in human decision making.

Our brain absorbs tremendous amounts of information during the day. Some of this information we consciously think about. But as the conscious part of the brain can only be focus on one thing at a time, our brain is looking for shortcuts to help us make decisions.

These mental unconscious shortcuts are called heuristics.

Unfortunately, these heuristics often fail to produce a correct judgment, and the result is cognitive biases.
The Ultimate list of Cognitive Biases
Affect Heuristic

A mental shortcut that allows people to make decisions quickly by bringing their emotional response into play. They make decisions according to their gut feeling.

Researchers have found that when people have a pleasant feeling about something, they see the benefits as high and the risks as low, and vice versa.

As such, the affect heuristic behaves as a first and fast response mechanism in decision-making.

For example, if someone has harmed you, you quickly arrive at the conclusion that this person is cold and unfriendly. If fact, even if the person didn’t harm you on purpose, you may still about him or her the same.
Anchoring

A cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.

For example, an initial price offered for a used car sets the standard for the rest of the negotiation.
Availability Heuristic

A mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision.

People tend to heavily weigh their judgments toward more recent information, making new opinions biased toward the latest news.

For example, which job is more dangerous – being a police officer or a logger? While high-profile police shootings might lead you to think that cops have a more dangerous job, statistics actually show that loggers are more likely to die on the job than cops.

This illustrates that availability heuristic helps people make fast, but sometimes incorrect assessment.
Bounded Rationality

The idea that in decision-making, people are limited by the information they have, the cognitive limitations of their minds, and the finite time. As a result, they seek for a “good enough” decision and tend to make a satisficing (rather than maximizing or optimizing) choice.

For example, during shopping when people buy something that they find acceptable, although that may not necessarily be their optimal choice.

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