Cognitive Biases: How Our Brain Influences Decision-Making - Research Paper

Introduction

Cognitive biases are an already established way of thinking used by the brain in decision making and judgments that almost every person makes. Most of the cognitive biases are memory-related, in which people tend to have stereotypical preformed thinking about something or someone making it challenging to change their minds. People have a collection of information, rules of thumbs which they use to filter the brain's decision-making. Research has shown that there is a trade-off between efficiency and accuracy (Montibeller, Gilberto, & Detlof 1238). Besides decision making, some cognitive biases are related to how one pays attention to a given problem and therefore, some people end up choosing what they want to pay attention to. Research in psychology and economics has shown some impact, especially on the investors' behavior. Concerning the investors' reaction, research has shown light in the present day Blockchain technology like the cryptocurrency market (Montibeller et al. 1242). The primary example of cognitive biases includes anchoring, confirmation, bandwagon effect, optimism, and misinformation. They each play crucial roles in the everyday life of an individual.

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How Cognitive Biases Has Hurt Us and the Problems They Cause in Modern Society

Cognitive biases have caused many humans to behave irrationally. In the Blockchain technology, there is a denomination effect in which people spend a trivial amount of money than they would its comparable fats bills (Hilbert & Martin 211). Sometimes people are much more confident in their abilities, making them undertake more significant risks in their daily lives. People today tend to make their decisions based on their emotions. Emotions affect how one perceives certain risks and benefits of various undertakings. The rise of cancer in the world today has proven to catastrophic. People dread having cancer, and therefore, anything linked to cancer is perceived as perilous unlike other minor devastating diseases that may as well cause death or any illness and injury like accidents.

People who are anchor biased tend to heavily rely on the initial firsthand information in their future decision making. The first piece of information usually forms the basis on which subsequent information will be evaluated. In the Blockchain technology, cryptocurrency, new entrants into the market have reported anchor bias when assessing the coin for the first time. The first person to report the price is usually better off as the subsequent entrants base their information on the first (Hilbert & Martin 211). It becomes hard to adjust the price of the coin given the price they are currently seeing. In any job market, the first person to quote a salary becomes a reference for others, which is not right.

Research has shown that people tend to do seek out and value information that confirms the existence of individual beliefs and opinions while ignoring or refuting reports challenging the same ideas (Haselton, Martie, Daniel, & Damian 13). In the bull and bear markets, investors do not just invest their money into a stock just because of a rumor, but that rumor has to be confirmed by substantial evidence using certain pieces of information. People are inclined to heed to the data, which endorses their perceptions rather than new information or contradicting information. Therefore, making decisions becomes a problem, especially when it is further information from what one previously knew.

The bandwagon effect is seen during bull markets and rapid asset-class growth in which people tend to adopt certain beliefs when they come into contact with more people holding that belief. People are today wearing a particular fashion just because other people have adopted the style (Haselton et al. 17). It applies to music, social networks, diets, and elections. The optimism bias has always been a misguided notion that the likelihoods of getting adverse proceedings are minimal while that of getting the affirmative events is greater. It quite often leads to poor decision making that has disastrous results.

Why Cognitive Biases Exist

In the case whereby one has to make a decision given the chance of considering all possible options, it usually takes one the longest time to come to a simple decision. Taking into consideration the sheer complexity of the world and the enormous information around us, it, therefore, becomes easy to rely on some mental shortcuts in making a quick decision (Hilbert & Martin 211). Although cognitive bias can sometimes be surprisingly accurate, it sometimes leads to errors in thinking. The contributing factors to biases include individual motivations, emotions, social pressure, and limits on the mind's ability to process information.

The evolutionary foundation of cognitive bias has been proposed by psychologists, who claim that our brain is armed with function-specific ways for distinctive resolutions. When confronted with a problem, to solve it, one uses certain evolved brain functions to perform the function (Thakore et al. 706). For instance, the eye has evolved in such a way that it exhibits proficiency with a unique effect of facilitating sight. The eye has not been reported to be flawed, but when other features are faulty, it depends on what perspective they are. They could be flawed in an attempt to adapt to a new environment.

The existence of cognitive bias has been attributed to the by-product of processing limitations. There is so much information in a very complex world with limited handling period and capability. Hence, we seek easier ways that sometimes may fail our pre-organized ways. Therefore, the circumstance results in heuristics, which is why cognitive biases exist (Thakore et al. 706). Secondly, the information at hand that needs to be solved to make a final decision may not have been the task that the mind has been designed to handle. The brain, therefore, will analyze the information concerning the already conceived information hence the existence of such biasness. Some researcher refers this to artifacts which are related to the neuroscience of the brain. It can only efficiently process what it already knows but will take time to conceive the new information.

Lastly, biases can arise from error management biases in which when someone responds to adaptive problems in a biased manner; they see it is associated with lower costs, unlike when responding unbiased, which has higher prices (Hilbert & Martin 211). If this happens, people will tend to allow for the existence of biasness. The social relationships determine whether one will respond to an adaptive problem in a biased or unbiased manner.

When and How Cognitive Biases Might Help in Making the Right Decisions

The cognitive biases do not necessarily serve only the negative effects, but they do have positive impacts as well, especially on Blockchain investors. For instance, investors may use the available or preformed information to reach a decision quickly. Just like a computer may use shortcuts to save the energy, an investor will most likely rely on the available data to make a more straightforward investment decision (Thakore et al. 706). Financial analysts have reported that the brain necessarily follows the heuristic or rules of thumb learned in our earlier lives from which it creates biases. The mind is made in such a way that it works to benefit our humanity rather than the process of our decision making. It is with evolutionary that our cognitive biases become great; it is a learned process. Unless one pays attention, an investor may end up using a lot of money.

In a situation where an investor is highly confident, he or she will invest a lot resulting in excessive or active trading. It may be a good sign. An investor, especially in the Blockchain technology, may be able to aver losses (Thakore et al. 706). When the chances of winning are high, and those or losing are low, still an investor may opt to avert the risk unless sure enough. Investors prefer to invest in what they are well versed with (Hilbert & Martin 211). They will invest in familiar investments, especially within their country, region, or company. The investors use the already perceived information to make decisions on what and when to invest rather than risking in new lands.

Investors are more likely to buy rather than sell stocks that catch their attention. They are afraid of exploring unfamiliar sectors that they have no adequate knowledge about. Therefore the cognitive bias information is sometimes quite essential for the investors. Anchor bias has enabled investors to anchor around the stock's purchasing and selling price (Haselton et al. 15). Quite often, these price has helped them in making right decisions resulting in profits. The investors want a confirmation that the market prices will give them the profits they seek rather than just gambling, and therefore, the prior information is essential on their decision in investing.

How Each Cognitive Biases Shape the Adoption and Evolution of Blockchain Technology

The different cognitive biases play different roles in adaptation and the growth of the Blockchain technology. Blockchain technology involves a transparent, trustless, and publicly accessible ledger which allows people to use secure transfer ownership of the unit of values using encryptions. In the development and evolution of Blockchain technology, which includes cryptocurrencies, the anchoring bias has been reported to be seen among the new market entrants. Once the first person has assessed and reported the first price of the coin, the other subsequent entrants base the price of the coins on the first person's report. Blockchain technology like Bitcoin cryptocurrencies has the tendency of their prices changing within even a day. The market entrant anchors their prices on the first price, and when the price changes, they sometimes exit the market to the sidelines. They make it hard to adjust their expectations of the current value despite projections of the future value.

Confirmation bias allows investors in the Blockchain market to be confident of the trading stocks. People want to confirm the existing belief or rumor to base their decisions on the information acquired. For instance, if a trade coin is expected to be trading, the investors will first want to confirm before they enter the market to avoid risking their money. They will analyze the subsequent pieces of information to see if the price of the stock is expected to spike (Chatfield). The confirmation bias has been as well related to emotional individuals. If one invests a lot in a coin hoping for its price to spike, but instead it dips, he or she may not exist on the coin's position as they will give increased weight to hopeful news even when in dwindling supply.

The bandwagon effect is affecting Blockchain technology, especially the altcoin, whereby the existing social media campaigns are used to suffocate people's decisions. Since most people believe something when they see lots of others hold onto the belief, therefore, it becomes a challenge for investors, especially in the future (Thakore et al. 706). The investors' decision-making process may be based on the current circulating information, which may be to trick them into investing their money on the coins. The optimism bias tricks investors into investing what they believe will have a positive outcome due to its highest possibility, which might not be the case in Blockchain technology. The information in the markets could as well mislead others. Misinformation can lead to wrong decision making. For instance, if someone in the stock trading shows others of the price, which after that, increases may not be a smart move for others as the coin might sharply change its price.

Work Cited

Montibeller, Gilberto,...