Editor’s note: This article was first published in April 2014; its example of buying a new plasma TV for €900 reflects the products and prices of that time, and plasma TVs are no longer made.
We continue our series on the cognitive biases that make us irrational even in situations where we think we are reasoning.
No one is immune to one or another of the hundreds of biases, but the good news is that once we know they are there, we can work to cancel them out. You can read our two previous articles, in which we explained some of them:
- Part 1: 3 biases, or ways your mind betrays you and holds you back in life
- Part 2: 3 biases that apply to business and investing
This time we are going to talk about status quo bias, which can stop you from earning more money, and about another bias whose name I don’t know (although it must have one), which makes you spend money on things you could do without.
Both rest on our own brain deceiving us, and the way to avoid them is to ask our brain the reverse question, which blocks the self-deception.
Status quo bias
Status quo bias basically means clinging to the current situation to avoid change. Our colleague Victoria Bernal says this bias is very common in Spain, while in the United States it is not very frequent.
Example: imagine you live in Andalusia and your company offers you a more senior position with a €10,000 raise, but to take it you have to move to Galicia. At that moment status quo bias gets to work, leading you to reason along certain lines.
In Andalusia I have my family nearby and I go out with my lifelong friends. In Galicia I don’t know anyone, and I would be far from my family and my friends.
How can you tell whether you are reasoning correctly or whether, on the contrary, status quo bias is doing your thinking for you?
Let’s ask the reverse question by putting you in the opposite situation. Imagine you live in Galicia, far from your family and friends, who are in Andalusia. Your company asks whether you would like to transfer to Andalusia, but earning €10,000 less. Would you take the deal?
The truth is that many of the people who would turn down a better-paid move because of the status quo would, in the reverse situation, also refuse to move close to their family if it meant a pay cut. Think about it.
The anti-saving bias
We probably buy lots of things we don’t need. I couldn’t say exactly which cognitive bias this behaviour falls under, but we do know how to fight it. In fact, it is a basic principle of financial education.
(Read: 7 mistakes we make with our personal finances)
Imagine you want to change your car or buy a new plasma TV, or make any other large, medium or small purchase. We are going to do the same thing again: think in reverse.
Before buying a €20,000 car, imagine you rub a lamp and a genie appears and offers you two options: do you want him to give you this car, or would you rather he gave you €20,000 in cash? In the same way, he lets you choose between a television and €900 in cash.
If, thinking in reverse, you believe you would choose the cash, that is surely because the money would be better off in your pocket than spent on the purchase you are considering.
It may sound silly, but every day many people damage both their finances and their personal situation because of hundreds of biases and fallacies they rarely stop to analyse.
Further reading
- Some biases that lead recruiters to make bad hiring decisions
- 5 money conversations you should have with your partner before getting married
Featured image: Vicki Nunn, Public domain, via Wikimedia Commons.
