The Psychology of Decision-Making:
Understanding Cognitive Biases
That Affect Choices

See also: Critical Thinking Skills

Have you ever made what felt like a reasonable decision at the time, only to look back later and wonder, “Why in the world did I ever think that was a good idea?” We've all been there. It can be baffling to realize your choices were embarrassingly irrational - but fascinating science reveals how the complex inner workings of psychology can sabotage our decision-making without us ever realizing it.

Understanding these mental blindspots - known as cognitive biases - is key to making better choices. By learning what skews our judgment, we can counteract the tricks our minds play on us.

This guide will walk you through the most notorious thinking traps revealed by behavioral psychology research, such as confirmation bias, anchoring, and loss aversion. We’ll unpack how each bias clandestinely warps our choices and equip you with strategies to overcome them.

The insights here will fundamentally change how you approach decisions - vastly improving your chances for optimal outcomes. Let’s dive into the pivotal, yet unseen, role psychology plays in the choices we make.

Confirmation Bias

Confirmation bias causes us to preferentially seek out and accept information that fits our preexisting beliefs, while ignoring or downplaying anything that contradicts them. This deep-rooted tendency to stay narrow-minded affects choices by limiting the information we factor into decisions and leading us to overestimate supporting evidence for our prior views.

For example, once Sam decided his candidate for an opening job was the frontrunner, he focused on interview statements and credentials that backed his assessment of her being the strongest choice. He overlooked aspects of other interviews that suggested the strengths of additional candidates, which challenged his initial perspective. Sam’s choices and recommendations stuck rigidly to his first impression due to his underlying drive to validate his beliefs.

Since our minds are more receptive to reinforcing information rather than objectivity, we must consciously counter this bias by exposing ourselves to dissenting views, weighing the evidence on multiple sides, and even role-playing counterarguments to broaden our understanding when making difficult choices. Otherwise, we risk clinging to questionable assumptions and choices due to the subtle bias of our brains towards staying constant in beliefs rather than updating them rationally.

Anchoring Bias

Chess player thinking about their next move.

Anchoring bias leads us to over-rely on the first piece of data encountered when estimating values, forecasting probabilities, or setting metrics for decisions. Our judgments get anchored to that initial reference point, and we fail to appropriately adjust evaluations away from that anchor as subsequent information comes in.

For instance, executives anchored too strongly on previous salaries for dated positions in determining appropriate compensation for a new role, undervaluing comprehensive data on current industry compensation trends and forecasts that warrant higher figures. Despite analysts surfacing benchmarks indicating 10% higher salaries were needed for competitiveness and retention, leadership clung to antiquated reference points, hampering efforts to attract talent due to anchoring bias in decision criteria setting.

By rooting our thinking in outdated data points or preliminary scenarios that crowd out the incorporation of new details, anchoring sabotages our ability to make responsive determinations aligned with fresh developments and discoveries over time. We must remain vigilant of the tendency to affix perceptions to preliminary information flows and intentionally expose ourselves to contrarian perspectives if we hope to overcome the clinging effects of anchors on the decisions we make.

Availability Heuristic

When judging probability or likely prevalence, we often resort to the availability heuristic, shortcutting rigorous assessment by gauging likelihood based on how easily examples come to mind. The more effortlessly we can recall or imagine something occurring, the more probable we estimate it to be, while we overlook less mentally available data pointing to alternative likelihoods.

For example, constant exposure to news coverage of plane crashes may make such tragedies feel more prevalent than statistically justified. Vivid disasters overtake duller data in shaping probability estimations, distorting conceptions of actual risk likelihoods in decisions like whether to fly or drive long distances for holiday trips.

Similarly, memorable personal experiences around stock volatility can spur investors to offload shares in reaction to dips that broader data would reveal as normal market corrections warranting holding patterns over panicked sales tied to past painful losses.

Our decision-making faculties are continually vulnerable to the tricks of availability bias, displacing rigorous reckoning with objective, holistic information sets. Training mental vigilance around less dramatic yet substantial data sources is key to offsetting the instinctive heuristic of availability.

Loss Aversion Bias

Loss aversion bias triggers disproportionate efforts to avoid losing resources or assets relative to acquiring equivalent gains. With losses psychologically hitting us twice as hard as gains, we become excessively risk-avoidant in choices to sidestep perceived as losses, even if math counters our emotion with compelling upside. Risk analysis is neglected as calculations calculate remarkably larger downside protection assets and funding required relative to objective data.

A notable case is managers requiring two-times predicted returns to pursue growth initiatives yet funneling excess capital to inefficient business units to delay acknowledging losses. Data showed closing German operations would maximize overall gains, but feared backlash from shuttering jobs would lead teams to stick to supporting the drained divisions in Germany, despite negative returns. Risk analysis data was ignored as loss aversion, which allowed German losses twice, and therefore, demonstrating the importance of risk-adjusted gains that was seen elsewhere.

Rather than rely on intuitive valuations between gains and losses, formal risk analysis frameworks comparing the two utilitarianly is pivotal. We must look past the easier avoidance of losses and force equal priority of upside gains, or progress will be stifled by a weighted bias toward safety from loss.

Sunk Cost Fallacy

The sunk cost fallacy drives escalating commitment to endeavors based primarily on previously expended resources, time, or funds investing— despite emerging data revealing cutting losses. Risk analysis arguing to minimize further waste is ignored as past expenditure justifies throwing good money after bad.

The classic example is a software re-platforming project where $10 million has already been spent over two years, yet no launchable product exists. Business case analysis says cutting losses now would save $7 million in costs this year alone. But executives don't want previous years viewed as wasted resources, so they double down on investing despite risk analysis saying benefits no longer warrant costs.

The logic of trying to redeem or get a return on prior investment frequently sabotages rational evaluation of choices. The key to unwinding the sunk cost fallacy is relegating past unrecoverable costs as inputs to future project risk analysis.

Overcoming Biases

While mental blind spots and decision-making shortcuts evolved to aid us in processing information efficiently, often these biases actively undermine optimal choices by clouding human being's rational judgment.

This is where quantitative risk analysis methodologies are particularly useful. As an example, Monte Carlo Risk Analysis allows a team member to mathematically test that an outcome is likely. Further, risk analysis methodologies incorporating multiple lenses, scenarios, and sensibilities guard against making shortsighted decisions.

Beyond simply relying on advisor or personal perspective, we should use data to help us objectively inform our decisions. Whether an executive continually defaults to initial preferences, or an investor affixes performance expectations to arbitrary historical benchmarks, tracing distortions back to biases like confirmation and anchoring and partitioning them off from genuine risk considerations is vital to clear analysis, which data reenforces.

No complex decision can afford blindspots or shortcuts—the stakes demand acknowledging and neutralizing biases by design through objective frameworks. Our minds and contexts need comprehensive tuning if we hope to conquer in-built cognitive biases.

Woman thinking about making a decision.

Key Takeaways: The Psychology of Decision-Making

As we’ve explored across numerous deceiving yet decisive biases - from the confirmatory pull of past beliefs to weights of first impressions that fail to update to outsized reactions to losses over gains - our minds often operate against us in shaping choices. Despite feeling instinctively rational at the moment, psychology has honed highly irrational forces directing our decision DNA.

While these largely invisible cognitive distortions feel futile to battle, the illuminating insights from behavioral science equip us to counteract their unseen influence through purposeful processes and perspective-balancing approaches.

By seeking dissenting views, formalizing risk frameworks, acknowledging our biased brains, and removing distorted anchors and points of pain that trigger counterproductive loss aversion, we can check harmful heuristics before they check optimal outcomes. Heed the psychology revealing your mind as much a foe as a friend in decision-making.

Outsmart inner enemies through self-awareness and structured systems to start controlling choices rather than being mastered by tricks of the mind. The first choice is yours - will you accept the science and make the shift?

About the Author

Norman from Aztech.

With a renowned expertise in the eCommerce industry and an entrepreneurial spirit, Gordon is the CEO of Aztech, a leading eCommerce solutions provider.

Since launching Aztech in 2021, Gordon has transformed the company into a prominent player in the eCommerce industry, scaling its client base to 25+ businesses within a span of just two years.