Cognitive Biases and Decision-Making: A Review of Psychological Mechanisms and Real-World Applications

Abstract

Cognitive prejudices are systematic patterns of divergence from norm rationality in judgment and have substantial influence on the way humans make decisions in personal, organizational and social contexts. During the last 50 years, cognitive psychology and behavioral economics research has shown that people often rely on mental shortcuts or heuristics in information processing and judgment under ambiguity. These heuristics provide us a means of taking quick decisions, but they can make us commit foreseeable blunders like Confirmation bias , Biasof anchoring , The Availability Heuristic , Effects of framing , Over-confidence . The heuristics and biases framework was initially devised by Tversky and Kahneman (1974), who demonstrated that human judgments frequently differ from the normative models of reason. Later work has extended this perspective by looking at the psychological underpinnings behind biased reasoning, and the ramifications for fields such as finance, health care, management, law, and public policy. This study offers an in-depth analysis of the key cognitive prejudices affecting decision making, explains their psychological roots and describes their actual world applications. The study points out that cognitive prejudices still exist for professionals and non-experts, even with increasing access to knowledge and technical support systems.