20 Fallacies In Business You Need To Know

Straw Man Fallacy

straw-man-fallacy
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Gambler’s Fallacy

gamblers-fallacy
Gambler’s fallacy is a mistaken belief that past events influence future events. This fallacy can manifest in several ways. One example, if how individuals mistakenly conclude past events. Instead, to prevent the gambler’s fallacy, business people need to know that the real world is more complex and subtle than a game, and rather than relying on complex models, they can rely on solid time-proved heuristics.

Base Rate Fallacy

base-rate-fallacy
The base rate fallacy occurs when an individual inaccurately judges the likelihood of a situation occurring by not considering all relevant data.

Pygmalion Effect

pygmalion-effect
The Pygmalion effect is a psychological phenomenon where higher expectations lead to an increase in performance. The Pygmalion effect was defined by psychologist Robert Rosenthal, who described it as “the phenomenon whereby one person’s expectation for another person’s behavior comes to serve as a self-fulfilling prophecy.”

Barnum Effect

barnum-effect
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

Bottom-Dollar Effect

bottom-dollar-effect
The bottom-dollar effect describes a tendency among consumers to dislike purchases that exhaust their remaining budget. If a consumer spends the last $50 in their bank account on dinner at a restaurant with friends, they may enjoy good food and good company. But after the meal, they feel dissatisfied because the meal has exhausted the last of their funds. Here, the negative emotions associated with running out of money have been applied to the meal itself. This is known as the bottom-dollar effect.

Bye-Now Effect

bye-now-effect
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye-bye” before ordering, the average price per meal rose to $45.

Butterfly Effect

butterfly-effect
In business, the butterfly effect describes the phenomenon where the simplest actions yield the largest rewards. The butterfly effect was coined by meteorologist Edward Lorenz in 1960 and as a result, it is most often associated with weather in pop culture. Lorenz noted that the small action of a butterfly fluttering its wings had the potential to cause progressively larger actions resulting in a typhoon.

IKEA Effect

ikea-effect
The IKEA effect is a cognitive bias that describes consumers’ tendency to value something more if they have made it themselves. That is why brands often use the IKEA effect to have customizations for final products, as they help the consumer relate to it more and therefore appending to it more value.

Halo Effect

halo-effect
The halo effect is a cognitive bias where the overall impression of a business, brand, or product influences how people feel and think about them. The halo effect was coined by psychologist Edward Thorndike in a 1920 study where military commanders were asked to rate subordinates based on several characteristics.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Ringelmann Effect

Ringelmann Effect
The Ringelmann effect describes the tendency for individuals within a group to become less productive as the group size increases.

Law of Unintended Consequences

law-of-unintended-consequences
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

House Money

house-money-effect
The house money effect was first described by researchers Richard Thaler and Eric Johnson in a 1990 study entitled Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. The house money effect is a cognitive bias where investors take higher risks on reinvested capital than they would on an initial investment.

Snowball Effect

snowball-effect
The snowball effect is a metaphor that describes any action or event as it evolves from something unimportant to something larger and more significant. The metaphor is named after the analogy of a snowball as it rolls down a hill covered in snow.  The snowball effect describes a scenario where one action or event results in many similar and more significant actions or events.

Hawthorne Effect

hawthorne-effect
The Hawthorne Effect refers to an inclination of some people to work harder or perform better when they know they are being observed. The effect is most associated with those who are experiment participants, who alter their behavior due to the attention they are receiving and not due to any manipulation of independent variables. Therefore, the Hawthorne Effect describes the tendency for a person to change their behavior with the awareness that they are being observed.

Cognitive Biases and Psychological Phenomena

  • Straw Man Fallacy: Misrepresenting an opponent’s argument to make it easier to rebut.
  • Gambler’s Fallacy: Mistaken belief that past events influence future events in games of chance.
  • Base Rate Fallacy: Inaccurately judging the likelihood of a situation by not considering all relevant data.
  • Pygmalion Effect: Higher expectations lead to an increase in performance.
  • Barnum Effect: Believing generic information is specifically tailored to oneself.
  • Bottom-Dollar Effect: Disliking purchases that exhaust remaining budget.
  • Bye-Now Effect: Mistaking the word “bye” for “buy” and paying more as a result.
  • Butterfly Effect: Simple actions yield large rewards.
  • IKEA Effect: Valuing something more if one has made it themselves.
  • Halo Effect: Overall impression influences feelings and thoughts about a business, brand, or product.
  • Dunning-Kruger Effect: People with low ability overestimate their competence.
  • Occam’s Razor: The simplest solution is often the best one.
  • Mandela Effect: Large groups remember an event differently from reality.
  • Crowding-Out Effect: Public sector spending reduces private sector spending.
  • Bandwagon Effect: More people adopting a belief increases individual adoption within a group.
  • Ringelmann Effect: Individuals become less productive as group size increases.
  • Law of Unintended Consequences: Actions can have unexpected and unintended effects.
  • House Money Effect: Investors take higher risks with reinvested capital than with initial investment.
  • Snowball Effect: Any action or event evolves from something small to something larger and significant.
  • Hawthorne Effect: People work harder or perform better when they know they are being observed.

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