Human Mind and Logical Fallacies

Karthik Nadig

1. Hyperbolic Discounting:

We are evolutionarily designed not to think of the future, hence our brain sucks at making evaluations when similar rewards are presented with a time difference. We tend to choose the one that arrives sooner than later. For instance, when offered the choice between $50 now and $100 a year from now, many people will choose the immediate $50. However, given the choice between $50 in five years or $100 in six years almost everyone will choose $100 in six years, even though that is the same choice seen at five years’ greater distance.
Ref: Hyperbolic Discounting

2. Understanding Sunk Cost:

Again another evolutionary feature that makes us believe that we need to make our invested resources count even after we know that it was a clear waste. For instance, let’s say you’re in the market for a replacement computer, and the best thing for what you want is a $500 PC. However, you’ve always been a Mac user and recently bought $600 on a wireless Apple keyboard. Now, even though you like everything better about the Dell (it comes with its own wireless keyboard), and it’s twice as cheap as the nearest Mac equivalent, your brain will tell you not to waste the money you spent on the keyboard. So, in the name of not letting the keyboard go to waste, you buy the Mac.
Ref: Sunk Cost
Example: source

3. The Disposition Effect:

In simple terms, instead of acknowledging losses in an investment, such as stocks which will never go up in value in reality, we instead wait for the value to go up. Although, the proper plan would be to sell and salvage, whatever possible, before the value drops further. This also includes storing stuff that you don’t need thinking that you’ll need it after you dispose it.
Ref: Disposition Effect

4. Irrational Escalation of Commitment:

This one stems from our ability to convince ourselves that we are right in our wrong decisions. This is seen in competitive scenarios, such as bidding, where one might end up paying more than the actual worth of an object quite simply to justify the competitive instinct.
Ref: Irrational Escalation of Commitment, Dollar Auction

5. Post-Purchase Rationalization:

Here we try to convince ourselves that the resource we just spent on nothing was actually worth it. This is not just money, can be anything, like time. This behavior of ours makes us believe that the procrastinated time was worth it. In terms of investment, you will keep investing in something just because you already invested in it. For instance, when faced with the prospect of a $3,000 repair on your car, or purchasing a slightly cheaper model car for $2,500, your brain will tell you to go with the repairs because you already sunk $10,000 on it. Your brain will have convinced itself that the last decision was a great idea. And since you’ve now sunk $13,000 into the car, it’s going to seem like an even better idea to keep piling up the bad decisions. On a similar note, be sure to read about the IPhone syndrome.
Ref: Post-Purchase Rationalization
Example: source

6. Money Illusion:

According to our brain $10 bill not equal in worth as ten $1 bills. Also, you are more likely to squander the money if you have ten $1 bills as compared to one $10 bill.
Ref: Money Illusion

7. Gambler’s Fallacy:

Our brain is terrible at probability, and the entire lottery business is based on this fact. For instance, if you flip a coin repeatedly and you get heads more than usual, then you are likely to think that you are going to get tails more often in the future or if you are not among the common then you may bet on heads. But, in reality, the odds of getting a head or tail is always same, for a fair coin.
Ref: Gambler’s Fallacy, Why Poor People Win The Lottery

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