CLUSTERING ILLUSION

Everyone is susceptible to illusions!

Cognitive biases have a significant impact on how our brain functions. It influences how we make decisions in our daily life. One such cognitive bias is Clustering Illusion. It is an illusion wherein we perceive a small sample of random data sets to be non-random and revealing a pattern such as seeing shapes in clouds. Understanding such illusions and taking steps to avoid such bias would help in proper decision-making in fields such as management, market research, and investment.
Research shows that the correlation between the returns of mutual funds for two consecutive years is barely higher than zero. And yet, we tend to invest in these funds looking at the past performance – Clustering Illusion at its best. 

These instances show how Clustering Illusion affects our choices and decisions. It is just another example of how we create false perceptions that need to be challenged through rigorous analysis, patience, and critical thinking. Knowing about this phenomenon can certainly help in skewing events to our advantage.