Learn evidence-based strategies to overcome your cognitive biases and make better long-term choices.
Cognitive biases can significantly impact both financial and health-related decisions, often leading to suboptimal outcomes. However, understanding these biases and actively counteracting them can improve long-term decision-making. Here’s a deeper dive into strategies to mitigate cognitive biases, backed by evidence. Even if you know some of these it is worth reminding yourself and taking action immediately after reading the blog.
1. Automating Long-Term Success
One of the most effective ways to counteract biases like temporal discounting and procrastination is to establish precommitment strategies. These strategies involve making decisions in advance that lock you into a course of action, reducing the chances of deviating based on short-term impulses.
For instance, pre-scheduling annual health checkups or setting a recurring savings contribution reduces the mental effort and bias that goes into making recurring decisions. For example, studies led by Nobel prize laureate Richard Thaler show that using such tools can increase saving rates by close to 400%.
2. Counteracting Confirmation Bias
Confirmation bias leads people to seek out information that confirms their preexisting beliefs while ignoring contradictory data. To counteract this bias, the first step is to recognize that it happens to everyone, including yourself, even if you are not aware. The next critical step is to put in place “structures” that help guard against this influence.
For example, investors can use financial advisors who challenge their assumptions. This approach can also be implemented regardless of a financial advisor. For example, investors can deliberately try to expose themselves to additional (credible) financial news sources than they are used to. A similar approach in healthcare is to seek second opinions for significant diagnoses or treatments.
3. Using “Ulysses Contracts”
Named after the mythological hero Ulysses, who tied himself to the mast to avoid being lured by the Sirens, Ulysses contracts involve creating external controls to enforce future decisions.
This can prevent impulsivity and help individuals stick to their long-term goals. For example, some people find it helpful to set penalties for withdrawing from long-term savings. In fact, retirement accounts with tax penalties can serve as a form of Ulysses contract as can apps like StickK, where users place monetary bets on their success.
In health contexts, Ulysses contracts can be used to quit smoking or stick to fitness goals by leveraging social pressure and financial consequences. For example, some research shows that declaring your goals to a social partner increases the chance of reaching the goal. If you use this method try to be as specific as possible (i.e. exactly what you will achieve and by when).
4. Incentivize Delayed Gratification
One of the most significant challenges in sticking to long-term health or financial goals is the brain’s tendency to prioritize short-term rewards—a phenomenon known as temporal discounting. To overcome this, incorporating immediate but controlled rewards can help balance short-term desires with long-term benefits.
Small, frequent rewards act as psychological “nudges” that motivate individuals to stay committed to long-term plans. These rewards are effective because they satisfy the brain's natural craving for immediate gratification without derailing the overarching goal.
For example, a series of research papers From Kevin Volpp’s lab has shown that providing small monetary rewards can increase the efficiency of a weight loss plan massively. In fact, these data show weight loss can be doubled or tripled!
Another line of research (e.g. Woolley et al, Personality and Social Psychology Bulletin) demonstrated that the small immediate rewards were more predictive of long-term success than the long-term goal itself.
Such approaches cleverly leverage the brain’s reward systems to sustain engagement with long-term objectives.
5. The Power of Feedback Loops
Both in health and finance, regularly reviewing progress is crucial for maintaining alignment with long-term goals. This practice, known as feedback looping, ensures that any deviations from the plan are caught early and corrected. Some behavioral economists argue that feedback loops are vital for keeping long-term objectives salient and avoiding drift caused by biases.
Monitoring can help adjust habits but also serves as a motivational tool by providing real-time data about progress. The key here is moderation because there is a large cost to feedback loops both in regard to the time and effort involved and to the risk of landing on the other extreme and checking too much (which leads to another host of biases and errors, especially in the financial domain). Finding the right balance, specifically in this domain, is a tricky task and it is recommended to start with external expert support.
6. The Emotional Trap
Emotional or knee-jerk decision-making often results in poor outcomes in both health and finance. People tend to make reactive choices when faced with stress, fear, or excitement, whether it’s panic-selling stocks during a market drop or abandoning a diet after initial setbacks. Numerous studies show that emotional involvement leads to cognitive biases such as loss aversion and optimism bias, which can derail even the best-laid plans.
One option to combat this aspect is to train yourself to make less emotional decisions or to put in place a-priori guidelines. For example, you could define a strict selling rule a priori (e.g. I will sell if the asset underperformed the benchmark by 10% for 1 year) de facto making the choices a long time before the emotional state. However, research shows that staying emotionally detached is extremely difficult for most individuals, especially in high-stakes areas like personal health and finances.
Another option in your toolkit is to rely on others you trust, and are not emotionally invested, to help make sure your decision is objective and data-driven. In fact in surveys, many financial advisors feel the main value they provide their clients is to help them stay focused on long-term strategies and prevent knee-jerk reactions to short-term market movements.
Conclusion
Overcoming cognitive biases in health and financial decisions is no easy task, but with the right strategies you can better align your actions with your long-term goals. At the end of the day, understanding your own biases is the first step toward smarter decisions. But even with self-awareness, the challenge of staying objective remains.
This is where we come in. Whether you prefer to take a hands-on approach or are looking for expert guidance, we're here to help. Our team of professionals is trained to manage these biases for you, ensuring that your health and wealth management plans stay on track. You’ll have the tools to make informed decisions yourself, but when the emotional stakes are high, you’ll also have the support of a trusted partner to manage your investments wisely.
Get in touch with us today to explore how we can help you build a bias-free strategy and secure your true wealth future.
Additional reading:
Barber, B. M., & Odean, T. Trading is hazardous to your wealth: The common stock investment performance of individual investors. Journal of Finance, 55(2), 773-806.
Benartzi, S., & Thaler, R. H. Behavioral economics and the retirement savings crisis. Science, 339(6124), 1152-1153.
Bryan, G., Karlan, D., & Nelson, S. Commitment devices. Annual Review of Economics, 2, 671-698.
Burke, L. E., et al. The effect of electronic self-monitoring on weight loss and dietary behavior change: A randomized trial. Journal of Medical Internet Research, 13(4), e113.
John, L. K., Loewenstein, G., Troxel, A. B., Norton, L., Fassbender, J. E., & Volpp, K. G. Financial incentives for extended weight loss: A randomized, controlled trial. Journal of General Internal Medicine, 26(6), 621-626.
Kramer, M. M. Financial advice and individual investor portfolio performance. Financial Management, 41(2), 395-428.
Lerner, J. S., & Keltner, D. Fear, anger, and risk. Journal of Behavioral Decision Making, 14(4), 287-306.
Loewenstein, G., Weber, E. U., Hsee, C. K., & Welch, N. Risk as feelings. Psychological Bulletin, 127(2), 267-286.
Thaler, R. H., & Benartzi, S. Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187.
Volpp, K. G., et al. A randomized, controlled trial of financial incentives for smoking cessation. New England Journal of Medicine, 360(7), 699-709.
Volpp, K. G., et al. Financial incentive-based approaches for weight loss: A randomized trial. Journal of the American Medical Association, 300(22), 2631-2637.
Woolley, K., & Fishbach, A. Immediate rewards predict adherence to long-term goals. Personality and Social Psychology Bulletin, 43(2), 151-162.