…And How to Avoid Them

Why do seasoned investors sell at the worst possible moment? Or why do brilliant and celebrated executives double down on doomed projects? It likely isn’t due to a lack of information, but rather an excess of confidence in themselves and their own rationality.

Kahneman and Tversky began laying the groundwork for understanding these errors back in the 1970s, naming the most common cognitive biases: representativeness, availability, anchoring, overconfidence, and illusion of control. These aren’t random mistakes; they are systematic. And we all make them.

These shortcuts (heuristics) have an evolutionary explanation: making quick decisions helped us survive as a species. But in complex contexts like financial markets or business strategy, they often mislead us. Below are five biases that derail decision-making (even if you think you’re immune):

1. Representativeness: confusing stereotypes with probabilities.
2. Availability: overestimating the importance of recent, vivid, or emotional information. If you just read about a plane crash, you’ll overrate the likelihood of one occurring.
3. Anchoring: allowing an irrelevant initial figure to skew your estimate.
4. Overconfidence: projecting timelines, risks, and returns with blind optimism. This leads to unrealistic budgets, flawed forecasts, and reckless choices.
5. Illusion of control: believing you can influence outcomes where chance plays a dominant role. Classic among traders who mistake luck for skill.

Press the button/link below to go to the Interactive Summary of the paper:

These biases distort decisions in investing, health, public policy, hiring… and they don’t go away on their own. The good news? They can be mitigated.

Kahneman was clear: it’s not about eliminating biases (that’s impossible), but about recognizing them and building systems that force us to think twice.

Try revisiting your last three key decisions. Were you overconfident? Did you assume you had more control than you did?

That’s where the real work begins!!!!

For more about the authors, click on the link below to discover our comments and notes on the book by Michael Lewis:

The Undoing Project: A Friendship that Change Our Minds

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