Definition
Cognitive bias refers to systematic patterns of deviation from rational judgment or objective decision-making that can influence economic behavior and market outcomes.
Why It Matters
Cognitive biases explain why individuals and institutions sometimes make decisions that deviate from classical economic models. These biases can affect investment choices, consumer behavior, and policy evaluation. Recognizing biases like overconfidence, loss aversion, or confirmation bias helps economists and financial planners design better strategies and anticipate market anomalies.
Example
An investor may hold onto losing stocks due to loss aversion, refusing to sell at a loss, even though selling would be financially optimal. Similarly, consumers may overvalue recent experiences (recency bias) when making spending or borrowing decisions.