The Cognitive Bias Codex, produced by entrepreneur and software engineer John Manoogian III in 2018, is a visual representation of 188 cognitive biases.
The image of the codex, shown below, takes the 188 biases and categorises them into four distinct groups: too much information; not enough meaning; need to act fast; and what should we remember?
These four groups are simplified for illustrative purposes. While the codex is a great visual representation of the vast number of biases we know about, it's actually too simple to be used for anything other than educational enlightenment.
For one, behavioural biases are split into two discreet but distinct groups; cognitive and affective.
Cognitive biases can be seen as systematic errors in the way we process information. In other words, the errors stem from our cognition - our thinking brain.
Affective biases are all about the heart. They're typically based on an individual's personal feelings and/or mood at the time a decision is made. They are our emotional biases.
The codex also doesn’t show the beautiful behavioural nuances of many of the biases it illustrates.
Of course, that’s mainly down to the fact that to show all the nuances, the interplay between biases, or even those biases that are cognitive and become affective, you’d need a lot more space than this image neatly sits on.
But this interplay between a whole host of cognitive and affective biases is exactly what's going on in people’s heads all the time.
Each bias is infiltrating the decision-making process, and each bias is impacting our own unique journey as we navigate the world around us.
Of course, understanding individual behavioural biases is very useful, and the codex helps with that.
But the magic happens when we can move from simply having a knowledge of individual biases, and get to a place where we can derive practical and meaningful behavioural insight.
To do this, we need to understand what happens when people are making decisions and a host of biases are present… at the same time.
The decision-making process
Depending on which neuroscience source you read, at least 90 per cent of the decision-making process happens outside of consciousness.
The majority of the process is subjected to unconscious behavioural bias and multiple heuristics, that is, mental shortcuts or rules of thumb.
This spans from the second we start to process any information we receive, to determining if there is value in the decision, to analysing and thinking about options, and then finally taking the decision itself.
But throughout this process, we need to remember that our behavioural biases don’t arrive like buses; one after the other.
They arrive at the same time, flooding the unconscious brain like a behavioural bias tsunami.
They collide to create the individual behavioural characteristics that drive our decisions and make us who we are.
To illustrate this point, let’s assume the following.
A client is making an important financial decision that involves taking a calculated risk.
They hold the belief that any risky asset is too risky for them. While searching online for “is investing too risky”, they find several articles that support their belief.
One article tells them there's a 40 per cent chance that stockmarket investments could lose money, but that in some cases, it could be as high as 70 per cent.
Three behavioural biases will absolutely play out here; confirmation bias, framing, and probability neglect.
These three biases will come together in the unconscious processing of that information. They will drive the client to a decision that may not be fact-based, or worse still, may be detrimental to their overall financial plan and objectives.
In other words, these biases come together to impact a person’s judgement, or the ability for someone to evaluate different sources of information and draw sensible conclusions from the facts and evidence available.
However what’s interesting to note here is that these three biases, in their own right, will present in different strengths depending on the person.
What this means is someone with strong confirmation bias, strong framing bias, and strong probability neglect, will be more persuadable when it comes to decision-making.
They will see an emotive news story and will likely react without necessarily searching for more information.
Someone with opposite strength biases will be naturally more discerning, or more likely to hear the emotive news story but then pause and seek out the additional information needed to make a decision.
Neither of these two extremes, persuadable or discerning, are bad in their own right.
But they are a manifestation of how someone navigates the noisy world we live in, and how they apply their judgement to important financial decisions.
Why this matters to advice
This understanding, this insight, changes how we communicate to clients, as well as how we engage with them in a broader financial planning sense.
It allows us to use behavioural characteristics such as judgement to segment clients and avoid the more traditional method of segmenting using wealth or demographics.
Understanding how behavioural biases collide, and how they come together to create behavioural characteristics, is a significant step forward in understanding how each and every client navigates the world they live in.
But judgement is only one characteristic.
When different behavioural biases come together they not only reveal judgement, but can reveal how we manage information conflict, how we use information in planning, and how our emotions can drive the choices we make.
Understanding this, in an evidence-based way, provides a window into the unconscious decision-making of every client.
It not only reveals how clients engage in the decision-making process, but provides the framework for advisers to know when to speak to clients, what to speak to them about and how to speak to them - three vital ingredients in helping a client on their journey to financial wellbeing.