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Cognitive biases lead us to faulty money decisions from "summary" of A psicologia financeira by Morgan Housel
Our minds are wired in a way that often leads us to make faulty money decisions. This happens because of cognitive biases, which are systematic patterns of deviation from rationality in judgment. These biases can cloud our judgment and lead us to make decisions that are not in our best financial interest. One common cognitive bias is the anchoring bias, where we rely too heavily on the first piece of information we receive when making decisions. For example, if we see a stock price drop significantly, we may anchor on that price and be hesitant to sell, even if it is the rational thing to do based on other factors. Another bias is the confirmation bias, where we seek out information that confirms our preexisting beliefs and ignore information that contradicts them. This can lead us to overlook warning signs or dismiss advice that goes against our initial thoughts on an investment. Loss aversion is another powerful bias that can influence our financial decisions. This bias causes us to feel the pain of losses more strongly than the pleasure of gains, leading us to take unnecessary risks to avoid losses or hold onto losing investments longer than we should. The availability bias is yet another cognitive bias that can impact our financial decisions. This bias causes us to overestimate the likelihood of events that are easily recalled, such as recent market fluctuations or news headlines. This can lead us to make decisions based on short-term trends rather than long-term fundamentals.- Understanding and being aware of these cognitive biases can help us make more rational and informed money decisions. By recognizing when these biases are at play, we can take steps to mitigate their influence and make choices that align with our financial goals and priorities.
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