Social Psychology Lessons for Entrepreneurs

Here are three life lessons you can learn from social psychology. They are three human biases that are viciously common. They can ruin your finances, your career and they your relationships. Each bias has a quick snippet of advice that may help you avoid it in the future.

Hyperbolic Discounting – ruins your finances

This is a form of current-moment bias that is related to dynamic inconsistency. It involves you making a decision in the present that your future self would have preferred you didn’t take. Yet, in both cases, you are using the same reasoning and have access to the same facts.

What influences most people is the potential for an immediate payoff, which may lead people to make decisions in the moment that they regret making in the future. Hyperbolic discounting is seen more often when it comes to money. People spend today for the pleasure of spending despite knowing the money could be better used for other things. Those people have the same facts and same knowledge in the present. They even have the same opinions in the present, but their Hyperbolic discounting bias leads them to make a decision now that they regret in the future. It is a form of inconsistent decision making over time and it can ruin your finances if you are ruled by it.

How to avoid it?

A lack of discipline is often the reason we opt for a present payoff as opposed to a delayed payoff. The only real way to fight this type of bias is with discipline. Can you save instead of spend, keep instead of eat, kiss instead of rub? Have the discipline needed to delay and to wait and you will do just fine.

Gambler’s Fallacy – ruins your career

The inability to understand probability in its truest form is difficult enough, but even understanding it in simple forms is hard for people with a gambler’s fallacy.

In its difficult form, probability is set against the principles and laws of the universe, and if these exist within the boundaries of infinity (there’s a paradox for you), then everything is possible and the probability of all things is 1, 0, -1, or all three.

In its simple form, probability means there are a certain number of outcomes and there is a certain chance of each outcome. People with Gambler’s fallacy will tend to believe that past instances and results will change what is going to happen in the future. It is called a Gambler’s fallacy because you see it most with gamblers.

For example, a person that plays the lottery may say, I have to keep playing, I have bought a ticket for the last 10 years and so am due a win. Even worse are the ones that say, “I have been playing the same numbers for the last ten years and the day I don’t play will be the day those numbers come up.” The chances of those numbers coming up do not change because the player didn’t play that week, nor because that player has played for the last ten years.

How to avoid it? 

You may simply have to learn about probability in order to fix this problem, but that is no bother because simple probability is easy to learn. For example, there is a 14 million to 1 chance of winning the UK national lottery. There is also exactly the same chance of your numbers coming up as there is the numbers 1, 2, 3, 4, 5, and 6 coming up in one draw.

Would you bet on that sequence of numbers? Probably not, and yet any numbers you pick have exactly the same probability of coming up. Learn about probability and you may be able to fix your gambler’s fallacy bias.

Illusory Correlation – Ruins relationships

This probably causes just as many relationships to end as Facebook does. It is where somebody perceives a relationship between two unrelated events. A great example is the guy that invites a new girlfriend to his home town. It is raining, and he walks quickly from the train station to his house. She walks with him, but slightly behind because she is not as fast. Upon getting to his house she is upset, but not because of the rain or because he was walking quickly.

She is upset because she has an Illusory Correlation that has led her to believe he is ashamed of her in some way or that he does not want other women in his hometown to know he is dating someone.

The man was walking quickly and was not holding hands because he wanted to get out of the rain and indoors. Him acting this way had nothing to do with her or his feelings for her, but she had an Illusory Correlation about a number of factors and events in that situation and she became convinced of something that wasn’t true.

How to avoid it?

You do not have to give everybody the benefit of the doubt as it is okay to have a suspicious and skeptical nature, but do come up with more than one scenario or reason. If you do reach a conclusion, ask yourself what alternative conclusions there may be and leave your mind open to other possibilities.

Michael McPherson is a graduate student from Boston University, freelance blogger and a regular contributor at www.topreviewstars.com. You may follow him on Twitter: @mcphersy

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