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Welcome, You are here at the Beacon! I am your host David Darab…prepare to have your Blind Spots Illuminated!So…It’s very appropriate, since our Team here at OmniStar Financial and Dental Systems Optimization are Experts in Blind Spots, that we devote this episode to Cognitive Biases which create Blind Spots.Let’s kick off our discussion with a quote from one of my favorite thinkers, Professor Richard Feynman, A theoretical Physicist, Exceptional Teacher, and Contributor to the Manhattan Project.> “The first principle is that you must not fool yourself and you are the easiest person to fool.”> Richard P. FeynmanIt is possible for people to be confused or unaware about something rather important. The fact that most people don’t know they are missing it doesn’t make it any less of a problem for them or their practices.This is the best definition of a Blind Spot!For those of us that remember the movie City Slickers, you may recall the main character played by Billy Crystal, went out West with his friends to find themselves during a midlife crisis. There he meets his guide, Curly, played by Jack Palance, a rough and leathery cattle rancher that will show them all a thing or two. Curly teaches them about the “one thing”, the secret of life that everyone must figure out for him or herself!Well, we all have “one thing” that we carry around that is unique to us, and it too is so very important to figure out. This one thing is with us at all times, at every twist and turn life throws at us. Every time we are facing a challenge or problem that requires us to make a decision this one thing is there, hiding silently, but contributing loudly to our choices, direction, and decisions…that one thing is our Cognitive Bias. It is unique to each one of us. If we are not aware of its presence or its powerful influence it creates Blind spots. A blind spot is something that is critically important even though we are unaware of it. The fact that you don’t know you are missing it doesn’t make it any less important. In fact, because you are unaware it becomes even more important.Here at OmniStar, it’s our Tag Line “Illuminating Blind Spots”. We consider it Job #1 to help you find, Illuminate and see your Blind Spots! It’s what we do because you can’t see your blind spots alone.“We see what you are incapable of… that's what we do.” David Darab, DDS, MBACognitive Biases affect how we make everyday decisions, big and small as well as how we think about and invest our money and create our wealth.A cognitive bias is an error in cognition that arises in a person’s line of reasoning when decision-making is flawed by personal beliefs.When the Bias is unseen by the individual but seen by others, it is a Blind Spot.The Cure here is recognizing and acknowledging that they exist. Once you become aware of these Cognitive Biases they are no longer Blind Spots.I am subject to this, as I bet you are too, in the areas of clinical practice, business decisions as well as finances and investing.I tend to “cubbyhole” things, giving a lot of weight to my time in the business. I think to myself…I have done this for 30 years, I have seen everything, I should be good to go! But that is not always the case. Just because it looks the same doesn’t make it the same. I can still find myself in “the ditch” when I overlooked a small feature or minor detail that has snuck up and “bit” me. So let’s dig deeper here.Let’s Illuminate for you what Cognitive Biases Exist so they will be less likely to create Blind Spots!Understanding Cognitive Biases first starts with understanding Heuristics.So what are Heuristics??Heuristics are mental shortcuts that ease the cognitive load of making a decision, we use them all time. … Examples of heuristics include rules of thumb, an educated guess, or been there and done that!When considering the term “Cognitive Biases”, it’s important to know that there is an overlap between cognitive biases and heuristics. At times these two terms are used interchangeably but they are not exactly the same.In his book, *Thinking, Fast and Slow*, Professor Daniel Kahneman defines heuristics as“a simple procedure that helps find adequate, though often imperfect, answers to difficult questions.”He also defines the relationship between Cognitive Biases and Heuristics as follows:“… cognitive biases stem from the reliance on judgmental heuristics.”Putting this together we see that…Heuristics are the “shortcuts” we use to reduce complexity in judgment and choice, Cognitive Biases result from the gaps between what “should be” and the Heuristically determined behavior.According to the Cognitive Bias Codex, there are an estimated 180 cognitive biases. This codex is a useful tool for visually representing all of the known biases that exist to date.The biases are arranged in a circle and can be divided into four quadrants. Each quadrant is dedicated to a specific group of cognitive biases:1. What should we remember?Biases that affect our memory for people, events, and information2. Too much informationBiases that affect how we perceive certain events and people3. Not enough meaningBiases that we use when we have too little information and need to fill in the gaps4. Need to act fastBiases that affect how we make decisionsCognitive biases can have a devastating effect on our business decisions as well as decisions relating to personal finance and wealth. At OmniStar we are experts at Illuminating Blind spots, so let’s take a look at what these Cognitive Biases are. Because…as it is said…What has been seen cannot be unseen, what has been learned cannot be unknown.There are over 40 cognitive biases that negatively impact our ability to make sound financial decisions. I won’t bore you with an exhaustive list, but let’s hit some of the most common ones and see if any of these might ring a bell, and possibly be hindering your decision making ability.Some of these biases include:Overconfidence BiasIs when confidence in our own judgment is greater than the objective accuracy of those judgments. It results from someone’s false sense of their skill, talent, or self-belief. It can be a dangerous bias and is very prolific in finance and business. The most common signs of overconfidence include the illusion of control, timing optimism, and the desirability effect, the belief that something will happen because you want it to.Self Serving BiasSelf-serving cognitive bias is the propensity to attribute positive outcomes to skill and negative outcomes to luck. In other words, we attribute the cause of something to whatever is in our own best interest. Many of us can recall times that we’ve done something and decided that if everything is going to plan, it’s due to skill, and if things go the other way, then it’s just bad luck.Herd MentalityHerd mentality is when you blindly copy and follow what your friends, colleagues, and peers are doing. When you do this, you are being influenced by emotion, rather than by independent analysis.Loss AversionLoss aversion is a tendency for investors to fear losses and avoid them more than they focus on trying to make profits. Many investors would rather not lose $2,000 than earn $3,000. The more losses one experiences, the more loss averse one likely becomes. It is common for both professional and amateur investors to hold on to losing investment positions for too long, whilst selling winners too soon.> “In human decision-making, losses loom larger than gains.”> Kahneman and TverskyFraming BiasFraming is when someone makes a decision because of the way information is presented to them, rather than based just on the facts. In other words, if someone sees the same facts presented in a different way, they are likely to come to a different conclusion about the information.You may choose to purchase capital equipment, buy a car, or purchase an investment depending on how the opportunity is presented to you.Anchoring BiasAnchoring is the idea that we use pre-existing data as a reference point for all subsequent data, which can skew our decision-making processes. If you see a car that costs $75,000 and then another car that costs $30,000, you could be influenced to think the second car is very cheap. Whereas, if you saw a $5,000 car first and the $30,000 one second, you might think it’s very expensive.Confirmation BiasConfirmation bias is the idea that people seek out information and data that confirms their pre-existing ideas. They tend to ignore contrary or conflicting information. This can be a very dangerous cognitive bias in business and investing. Using confirmatory bias, we tend to search for, interpret, and remember information in a way that confirms our existing preconceptions. This unconscious bias makes it possible to miss findings or ignore evidence that could otherwise change our view.Hindsight BiasHindsight bias is the theory that when people predict a correct outcome, they wrongly believe that they “knew it all along”, which falsely inflates their confidence for future decisions.The Curse of Knowledge BiasWhen knowledge of a topic diminishes our ability to think about it from a less-informed, but more neutral, perspective. I call this…“You don’t know what you don’t know paradox!”or, “a little knowledge can be dangerous” bias.Blind Spot BiasDemonstrated when we think we’re less prone to cognitive bias than those around us. People see themselves differently from how they see others. They are immersed in their own sensations, emotions, and thoughts while at the same time their experience of others is dominated by what can be observed externally.Information BiasSometimes we tend to seek information even when it does not affect action. Better decisions can often be made with less information – more is not always better.When we constantly seek more information we are falsely concluding a better decision will result.More information is not always better.Better information is better.Optimism BiasThis is seen when we tend to overestimate the probability of positive outcomes but underestimate the potential for negative ones. 80% of us are prone to this cognitive illusion.This is the power of positive thinking, but not the best heuristic for the best outcomes.Mental Accounting BiasMental accounting explains how we tend to assign subjective value to our money, usually in ways that violate basic economic principles.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. In reality, money is fungible and one dollar is worth as much as the next, whatever its source or purpose. This bias affects how we rationalize our spending and investment decisions.Here is an example…Imagine you’re walking down the street, and you happen to find a $100 bill lying on the sidewalk. Ordinarily, you’re a pretty frugal person, and you’ve been trying to save some money to put towards buying a car in the future. Today, however, you take your newfound $100 and put it towards an expensive dinner. You tell yourself that this money isn’t “car money” — this is a one-off, special occasion, so why not treat yourself to a nice evening out?You have just fallen victim to Mental Accounting Bias.Outcome BiasThe tendency to judge a decision by its eventual outcome, rather than the quality of the decision when it was made. This behavioral tendency leads us to de-emphasize the events preceding an investment outcome, whilst overemphasizing the outcome.> “The fact that something worked doesn’t mean it was the result of a correct decision, and the fact that something failed doesn’t mean the decision was wrong. This is at least as true in investing as it is in sports.”> Howard Marks – Inspiration from the World of Sports Memo (2015)In business, making a good and sound decision does not guarantee a good outcome. Recency BiasWhen people weigh recent events and observations more heavily than those in the past.With this bias, we tend to base our thinking disproportionately on whatever comes most easily to mind. In an investment context, this can be dangerous because we are likely to lean more heavily on our experience of recent investment performance when considering future returns.Older people can display marked recency bias, with a focus on positive memories. This has potentially significant implications for the important investment decisions they make as they approach retirement.> “We look at the most recent evidence, take it too seriously, and expect that things will continue in that way.”> Dan Ariely – Predictably Irrational (2010)Regret AversionThe tendency to avoid making decisions that we fear we could later regret.Risk CompensationThis suggests that we adjust our behavior according to our perception of the risk level, becoming less careful when we feel safer and more cautious when the perceived risk level increases.Status Quo BiasEvident when people resist change and prefer things to stay the same or stick with previous decisions.Sunk Cost EffectThe tendency to throw good money after bad. Can lead us to continue investing into a project based on our earlier decisions, rather than on its current objective merits or despite new evidence suggesting that the decision was probably wrong.I think of this as, “What’s past is past!”The IKEA EffectThis bias explains the tendency for people to place a disproportionately high value on objects that they partially created themselves, regardless of the quality of the end result.This is especially prevalent in clinical dentistry.and finally…Dunning–Kruger effectIs a cognitive bias in which people with low ability at a task overestimate their ability. It is related to the cognitive bias of illusory superiority and comes from the inability of people to recognize their lack of ability.[image:3C24884B-4665-43AB-A892-1FAD5A5B4821-9378-000098BBC7F6B8B6/Dunning-Kruger.jpg]Even with this partial list, you can get a feel for how many Cognitive Biases there are and how influenced by them we can be, distorting our ability to make sound and accurate decisions.Have you encountered any of these yourself?? I know I have and learn volumes about myself researching for this podcast.Now that we have some awareness of our Cognitive Biases let’s look at some strategies to overcome them. I’ll outline 5 actions for you to consider…#1 Separate the Problem from the DecisionMake sure you thoroughly understand the Problem first which requires you to make a decision. Separate the problem from your decision-making, rarely does a decision have to be made immediately or simultaneously.#2 Reflect on past decisionsIf you’ve been in a similar situation before, you can reflect on the outcomes of those previous decisions to learn how to overcome your biases. Learn from your previous decisions, both good and bad. What went well…if so why? What went poorly…if so what would you avoid or do differently?#3 Include external viewpointsThere is some evidence that we make better decisions when we consult with other people who are more objective, such as advisors, coaches, mentors, and trusted friends and colleagues. Therefore, before making a decision, talk to other people to consider different viewpoints and have your own views challenged. Importantly, other people might spot your own cognitive Biases, Blind Spots, as we say here at OmniStar!#4. Challenge your viewpointsWhen making a decision, try to see the weaknesses and “poke holes” in your thinking regardless of how small, unlikely, or inconsequential these weaknesses might seem. You can be more confident in your decision if it withstands serious, critical scrutiny. This “Devil’s Advocate” role and voice are crucial to point out flaws in your thinking. If this alternative view proves stronger, time to rethink your decision.#5 Delay decisions, do not act when under pressureA final way to protect yourself from relying on your cognitive biases is to avoid making any decisions under time pressure. Rarely does a significant decision have to be made immediately. If decisions can be delayed, many times the problem that initiated the need for action may resolve, better alternatives may present themself, or additional information can be obtained which aids in the decision process.A Take-Home MessageWe often rely on cognitive heuristics and biases when making decisions.Heuristics can be useful in certain circumstances; however, heuristics and biases can result in poor decision-making and reinforce unhealthy behavior.When we are not aware of them, they create Blind Spots which can lead to unpredictable and adverse outcomes. There are many different types of cognitive biases, and all of us are victims of one or more.However, being aware of our biases and how they affect our behavior is the first step toward resisting them.So that wraps things up for this Podcast. We hope this information has created a few "Ah-Ha" moments to help you better understand some of your biases. Once you are aware you can take corrective action and achieve better outcomes. Please share this Podcast if you found it helpful, and leave a review on iTunes too. We welcome your feedback and suggestions for future podcast sessions. You can always find me, your host, David Darab, at my Twitter handle, @ddarab.Remember our Team here at OmniStar DSO stands ready to help you and your practice with any Blind Spots and questions.We see what you are incapable of… that's what we do.Thank you so very much for tuning in and listening. We are very grateful for your time and attention and so delighted to have you in our audience.https://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555