Money Crashers: 10 Cognitive Biases in Your Brain That Are Costing You Money

A few months ago, I made a rare impulse buy at the Barnes & Noble in New Brunswick: a book called How Not to Be Wrong: The Power of Mathematical Thinking, by Jordan Ellenberg. This turned out to be a fascinating read, examining the many ways in which your instincts can lead you into wrong thinking and how understanding some basic mathematical concepts—not higher math, but stuff like probability, which applies to all kinds of real-world problems—can stop you from being wrong. What makes it so interesting is not the mathematical concepts themselves, but the stories Ellenberg uses to illustrate them, such as the one about how Abraham Wald figured out where to put armor on WWII planes (which I'd first heard as a puzzler on "Car Talk"), or the one about how a bunch of MIT students figured out how to beat the Massachusetts state lottery. And he also discusses ways to apply the same mathematical concepts to your own everyday life, such as figuring out the optimal time to leave for the airport before your plane is scheduled to take off.

This book and its ideas were still in the back of my mind when I happened across this video on YouTube, which discusses 12 common cognitive biases—the same sort of mental traps Ellenberg discusses in his book—and how to beat them. Many of the examples in the video involve mistakes people make with money. Putting this together in my head with the book, I decided the topic of cognitive biases and how they affect our finances would actually make a great article for Money Crashers.

I sifted through the cognitive biases covered in the video, along with a couple of others I'd seen discussed in Ellenberg's book and other sources, and narrowed it down to a list of ten that I thought were most likely to affect you financially. Even with just ten biases, it's a rather long article, but I think it's an interesting one—particularly since it's a topic that applies to everyone, not just folks who happen to be (for example) shopping for a mortgage or looking to save on auto insurance.

If you're at all interested in math, psychology, behavioral economics, or any similarly nerdy subject, you'll probably find this article interesting on an intellectual level. And if you aren't, but you handle money on a regular basis, you'll probably find it relevant enough to your life to be interesting on a purely practical level.

10 Cognitive Biases in Your Brain That Are Costing You Money