We like to believe our decisions are based on logic, but behavioural economics suggests otherwise. From sunk cost fallacies to the halo effect, here’s how cognitive biases shape our choices.
Like everyone, I like to believe that all my decisions are based on rationality. Even if I make a mistake, hindsight bias—the tendency to see past events as more predictable than they actually were—makes the outcome seem more rational. I wonder if the same bias dominates the market after a period of depression.
As a commerce major, I always found the assumption in economics that people make purely rational decisions a little absurd. Recently, I came across a whole different branch of economics called behavioural economics. While I was familiar with the term, I had never really looked into it. It integrates psychology and economics, directly contradicting the idea that human decisions are purely rational.
I’m not particularly interested in the theories behind it but rather in how it applies to real life. Take the sunk cost fallacy, for example—the tendency to stick with bad decisions simply because we’ve already invested time or money in them. I can think of countless times I’ve unconsciously fallen into this trap. But one time I didn’t. When I walked out of a movie midway I found it unbearably boring. (It was La La Land—please don’t hate me.)
Another common cognitive bias is the halo effect, where one positive trait influences our overall perception of someone. Readers, for example, often assume that if an author writes insightful books, they must be wise in other areas of life too. This is probably why so many people blindly follow confident, smart-looking individuals’ investment advice without ever checking their credentials.
These biases don’t always lead to irrational decisions—sometimes, they just affect our emotions. Loss aversion makes losses feel more painful than equivalent gains feel rewarding. The endowment effect causes us to overvalue things we own, even when they’re not worth much.
Ultimately, these mental shortcuts help us conserve energy rather than overanalyzing every small decision. Perhaps the most rational choice would be to abandon all biases and wake up as a blank slate every day—but maybe we aren’t designed to be purely rational. After all, it’s emotions that get us out of bed and keep us moving.
At the end of the day, there’s no such thing as a foolish decision—at least, not if it results in profit. Everything else? That’s just philosophy.