Confirmation bias

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Confirmation bias is the tendency for individuals to seek out and interpret information that supports their preexisting beliefs, while simultaneously disregarding information that contradicts those beliefs (Nickerson, 1998). This cognitive bias can have significant implications for decision-making and problem-solving, as it can lead individuals to make judgments that are not based on factual evidence, but rather on their own biases and preconceived notions. One related concept that is often discussed in conjunction with confirmation bias is the framing effect, which refers to the way in which information is presented and how it can influence an individual's perception and decision-making (Tversky & Kahneman, 1981). For example, if a doctor presents a patient with two treatment options, one with a 90% success rate and one with a 10% failure rate, the patient may perceive the first option as more favorable, even though both options are effectively the same. This is because the way the information is presented, or "framed," can affect how it is perceived and interpreted. The relationship between confirmation bias and the framing effect is particularly relevant in the field of behavioral economics, which studies how psychological, emotional, and social factors influence economic decision-making (Thaler, 2015). Behavioral economists have found that individuals are often prone to confirmation bias and the framing effect when making economic decisions, which can lead to suboptimal outcomes and irrational behavior (Kahneman, 2003). For instance, consider a scenario in which an individual is trying to decide whether to invest in a particular stock. If they have a preexisting belief that the stock is a good investment, they may be more likely to seek out information that supports this belief, such as positive news articles or analyst recommendations. At the same time, they may disregard information that contradicts their belief, such as negative news articles or warnings from financial advisors. This confirmation bias could lead the individual to make an investment decision that is not based on a full and objective analysis of the available information, but rather on their preexisting bias. Similarly, the framing effect can come into play when an individual is presented with different options for investing their money. For example, if they are presented with two investment options, one with a potential 10% return and one with a potential 90% loss, they may be more likely to choose the option with the potential 10% return, even though both options are effectively the same in terms of potential gain or loss. This is because the way the information is framed, with one option presented as a potential gain and the other as a potential loss, can influence the individual's perception and decision-making. Both confirmation bias and the framing effect can have significant consequences for economic decision-making, as they can lead individuals to make judgments that are not based on objective analysis, but rather on their own biases and preconceived notions. This can result in suboptimal outcomes and irrational behavior, such as investing in risky or poorly performing assets or failing to take advantage of potentially lucrative opportunities. To mitigate the effects of confirmation bias and the framing effect, it is important for individuals to be aware of these biases and to actively seek out and consider a wide range of information when making decisions. It can also be helpful to seek the advice of others 2

who may have different perspectives and to consider the potential biases and motivations of those providing information. By being mindful of these cognitive biases and taking steps to overcome them, individuals can improve their decision-making and increase the chances of achieving their goals. In addition to these cognitive biases, there are several other factors that can contribute to suboptimal decision-making in the realm of behavioral economics. One such factor is loss aversion, which refers to the tendency for individuals to place a greater value on avoiding losses than on acquiring equivalent gains (Kahneman & Tversky, 1979). This can lead to risk-averse behavior, as individuals may be more likely to avoid taking risks in order to avoid potential losses, even if the potential rewards are higher. Another factor that can influence economic decision-making is the availability heuristic, which refers to the tendency for individuals to base their judgments on the information that is most readily available to them (Tversky & Kahneman, 1973). This can lead to biased or incomplete decision-making, as individuals may not consider all of the relevant information or may give greater weight to information that is more easily accessible. Finally, the overconfidence bias, or the tendency for individuals to overestimate their own abilities or knowledge, can also impact economic decision-making (Weber, Shafir, & Blais, 2002). This bias can lead individuals to make overly optimistic or unrealistic predictions about the future, which can in turn affect their investment decisions and risk- taking behavior. Overall, confirmation bias, the framing effect, and these other cognitive biases can have significant consequences for economic decision-making, leading to suboptimal outcomes and irrational behavior. By being aware of these biases and taking steps to mitigate their impact, individuals can improve their decision-making and increase the chances of achieving their goals. References: Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-291. Tversky, A., & Kahneman, D. (1973). Availability: A heuristic for judging frequency and probability. Cognitive Psychology, 5(2), 207-232. Weber, M., Shafir, E., & Blais, A. R. (2002). A verb is worth a thousand pictures: Why choice overload matters. Journal of Behavioral Decision Making, 15(3), 191-206. Kahneman, D. (2003). Maps of bounded rationality: A perspective on intuitive judgment and choice. Nobel Prize Lecture. Retrieved from https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/lecture/ Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2(2), 175-220. Thaler, R. H. (2015). Misbehaving: The making of behavioral economics. W. W. Norton & Company. Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453-458. 3

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