Cognitive Errors: Origins and Coping Strategies
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This research conducts an in-depth analysis of the major cognitive biases, sentiments, and thought mechanisms that induce cognitive errors in financial decision-making by utilizing a systematic literature review methodology. Furthermore, it re-examines various behavioral economic coping strategies that decision-makers can employ to address these cognitive errors. Biases associated with negativity, first impression, confirmation, overconfidence, growth, and bullshit (nonsense) drive irrational investment behaviors. Investments are also affected by sentiment-driven thinking and social media trends. Two cognitive limitations, the law of least effort and cognitive ease, lead to judgment errors. The resulting cognitive errors necessitate critical thinking. I propose eight remedies for cognitive errors: MAP, MINDSPACE, system models, choice architecture, Bayesian thinking with AI, bias backwardation, skin-in-the-game strategies, and intuitive expertise. These not only facilitate the integration of critical thinking, advanced technology, and intuition but also offer pragmatic solutions to the problems arising from biases, sentiments, fundamental cognitive limitations. The practical implications of the findings for financial practitioners, policymakers, and educators are also offered.
Abstract
This research conducts an in-depth analysis of the major cognitive biases, sentiments, and thought mechanisms that induce cognitive errors in financial decision-making by utilizing a systematic literature review methodology. Furthermore, it re-examines various behavioral economic coping strategies that decision-makers can employ to address these cognitive errors. Biases associated with negativity, first impression, confirmation, overconfidence, growth, and bullshit (nonsense) drive irrational investment behaviors. Investments are also affected by sentiment-driven thinking and social media trends. Two cognitive limitations, the law of least effort and cognitive ease, lead to judgment errors. The resulting cognitive errors necessitate critical thinking. I propose eight remedies for cognitive errors: MAP, MINDSPACE, system models, choice architecture, Bayesian thinking with AI, bias backwardation, skin-in-the-game strategies, and intuitive expertise. These not only facilitate the integration of critical thinking, advanced technology, and intuition but also offer pragmatic solutions to the problems arising from biases, sentiments, fundamental cognitive limitations. The practical implications of the findings for financial practitioners, policymakers, and educators are also offered.
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