How Cognitive Biases Lead You Towards Bankruptcy

How Cognitive Biases Lead You Towards Bankruptcy

The term cognitive bias defines an error in decision making or reasoning. This means disregarding an accurate, as well as, objective information in favor of subjective preferences and believes. In other words, people exhibit cognitive behavior when they go with their gut feeling, and overlook the objective information that is essential for the smart decision-making process. Adding to this, such persistent irrational behavior or bad choices can lead you to bankruptcy. Let’s have a look at the examples of cognitive bias.

  • Sunk Cost Fallacy

Sunk cost fallacy means that your decisions are tainted by the emotional attitude. The more you feed your mind for emotional decision making, the harder it becomes to abandon it. To avoid bankruptcy situations, one needs to make a rational decision with emotional intelligence. Therefore, the frequent cognitive bias which is usually visible in bankruptcy practice is the Sunk Cost Fallacy. In which the client normally refused to surrender an expensive house or car because they have put a hefty amount into that asset. Also, surrendering that asset means throwing away their money. Obviously, in crippled financial times, the sane mind says, that, you need to re-evaluate your situation and analyze what you can comfortably afford and what you cannot. Further, if you are considering bankruptcy then you need to fight against the sunk cost fallacy. There is a famous saying, that: “don’t throw your good money after bad”, which is a right approach if you are struggling with a sunk cost decision.

  • Framing Effect

Yet another example of cognitive bias is called “Framing Effect”. In which people responded to multiple choice in different ways depending upon how it is presented, either as a gain or as a loss. A case in point is when a salesperson utilizes selective facts to tempt their customer to make a purchase, which they really don’t need. Some slick salesman used the framing effect to convince their potential customers that they will save tens of thousands of dollars on their vacation by buying a timeshare in Orlando in comparison to the cost of staying in a hotel for a unique vacation, every year. After making the said purchase they are bombarded with multiple maintenance fees, which eat up their savings. Families who are victims of this framing effect still stuck with multiple timeshares. Besides this, some aggressive salespersons force a customer to make purchases on things they don’t need them such as carpet shampooing system, solar panel installations or water purification systems.

How Bankruptcy Can Help Undo Bad Decisions

In a nutshell, there are many more cognitive biases, identified by the experienced psychologists, which can lead you towards bankruptcy but you get the picture. There is no doubt that anyone can fall prey to lapses in judgment, though we need rationalization in the greater interest of ourselves. But, if you are unable to pay for your basic necessities like clothing, food, and shelter because the disposable income is allocated for the payment of housing and transportation. Then, in such a scenario, payment of non-necessities like timeshare or water purification system is not a good idea, and need of a bankruptcy lawyer is a must. A Detroit bankruptcy lawyer can save your financial condition by taking you out of the bad deal as well as poor decision making. Last but not least, it can help you in regaining your peace of mind.