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The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics

May 24, 2019

This episode is about present versus future biases. This is part 4 of our 8 part series about biases. We've already talked about personal biases, how we think about ourselves versus other people, and memories. When it comes to present versus future, people want their payoffs now, so humans tend to place a greater weight on the outcome that is closer to now. Other things that impact our decisions include losses and risks. We are impacted more by losses than gains. We are also biased towards maintaining the status quo.

I talk about optimism bias and even pessimism bias. When you know the rules of the game, it can be easier than you think to trick your brain into doing more in your favor – whether it is making choices today that you will appreciate tomorrow, or helping to get yourself out of a negative spiral. This episode will help you understand why we tend to make decisions a certain way and enable you to make better decisions for your business and your life.

Show Notes:

  • [04:10] People want their payoffs as quickly as possible. We place greater weight on things that happen closer to now.
  • [04:31] This is closely tied to time discounting (what I call the “I’ll start Monday effect”).
  • [04:39] We tend to make decisions today that our future self may not be as happy about.
  • [05:39] Due to diversification or projection bias, we may think our future self will want more variety than we really want or will use.
  • [06:07] You think you'll want options that are more virtuous - could be related to optimism bias.
  • [07:14] Due to impact bias, we overestimate the duration of intensity of the impact of how we will feel in the future.
  • [07:50] We are also victim to projection bias, which means we overestimate how much our future self will share the preferences we have today.
  • [08:34] Reactance is the urge to rebel and do the opposite of what someone wants you to do to hold on to some form of control and power.
  • [10:44] Irrational escalation – also known as the sunk cost fallacy – where people will keep spending and justify pouring money into a bad prior investment even though evidence shows it is bad.
  • [12:43] As your brain gets overwhelmed your subconscious is more likely to take the reigns, meaning you will make more battery and present-focused decisions.
  • [13:47] The hot-cold empathy gap finds that in a cold state it's much easier to make better decisions then in a hot state or in the moment.
  • [16:01] The reverse is the cold-hot empathy gap where smokers underestimated their cravings to smoke when they were in a cold state.
  • [17:26] People are impacted more by losses than gains – and it takes double the joy felt by a gain to equal the pain felt by a loss.
  • [17:52] Dread aversion – dread results in double the emotional impact of savoring.
  • [20:11] We tend to beef up the status quo and defend it more than may be warranted because of system justification.
  • [20:33] Due to normalcy bias and not wanting to think about change, we may refuse to plan for or have the proper reaction to a disaster which has never happened before.
  • [21:35] Due to a zero risk bias, we will prefer to reduce a small risk down to nothing than taking a bigger reduction in a larger risk.
  • [22:47] Because of risk compensation or the Peltzman effect, we are more likely to take a greater risk when our perceived safety increases.
  • [24:26] Because of the pseudocertainty effect we are more likely to make choices that avoid risk if the expected outcome is a good one, but seek out risk in an attempt to avoid a negative outcome. Which could lead to the ostrich effect or ignoring a negative situation.
  • [26:06] A predisposition toward viewing the past in a positive way and the future in a negative way is called declinism.
  • [26:21] The pessimism bias is to overestimate the likelihood of negative things happening to us in the future.
  • [26:42] A zero sum bias is where you think that the only way one person gains is at the expense of another.
  • [27:05] Look for the win win. For one person to succeed, it doesn't mean that another person has to fail.
  • [27:25] Negativity bias is when it's easier for us to remember negative memories over positive memories. The worse than average effect is where we believe that we are worse at tasks than average people are.
  • [29:06] Acting like a confident, optimistic person can create the benefits as if you are confident and optimistic.
  • [29:44] When you know the rules of the game, it can be easier than you think to trick your brain into doing more in your favor and using these biases as your advantage.

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