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Types of Heuristics in Decision Making

There are three main types of decision making biases discussed: heuristic biases, anchoring and adjustment heuristics, and representativeness heuristic. Heuristic biases involve using mental shortcuts that can ignore relevant information. Anchoring and adjustment heuristics involve using an initial anchor value and adjusting estimates from that anchor, which can lead to biases. Representativeness heuristic involves relying on a single representative case which can create stereotypes. Overconfidence is also discussed, which is putting too much weight on one's own abilities rather than objective measures.

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AAditya Shaujan Paudel
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32 views3 pages

Types of Heuristics in Decision Making

There are three main types of decision making biases discussed: heuristic biases, anchoring and adjustment heuristics, and representativeness heuristic. Heuristic biases involve using mental shortcuts that can ignore relevant information. Anchoring and adjustment heuristics involve using an initial anchor value and adjusting estimates from that anchor, which can lead to biases. Representativeness heuristic involves relying on a single representative case which can create stereotypes. Overconfidence is also discussed, which is putting too much weight on one's own abilities rather than objective measures.

Uploaded by

AAditya Shaujan Paudel
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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2.

2 Types of decision making biases

2.2.1 Heuristic

The bounded rationality leads to the development of less adequate measures of decision making.
Due to limited cognitive abilities the decision maker uses simple model to solve complex
problems by using mental short cuts. These models of decision making are known as heuristic.
However, the decisions selection which are based on heuristics are less efficient than the
decisions selected through optimization model because optimization method takes into account
all the relevant information and uses the best method to select the best alternative. In
contradiction heuristics ignores information in order to attain fast and simplified decision making
(Maitland & Sammartino, 2015).

There are three types of heuristics namely representativeness heuristics,Availability heuristic and
anchoring and judgement heuristcs (Kahneman, Slovic, & Tversky, 1982).

The cognitive system of the decision maker possesses two types of subsystem namely Subsystem
1 and Subsystem 2. Subsystem 1 has automatic regulation, uses little effort and uses heuristics.
Likewise the system 2 is voluntary, needs efforts, based on rules (Epstein, 1994).

[Link] Availability heuristics


It suggests that the decision maker takes the decisions based on the information that are easy to
recall and that are stored in the memory as common information. It is based upon the ease of
thinking ( Ehrlinger, 2016).

Availability heuristics is used frequently as the decision making tool because it’s easy and fast to
decide something by recalling the events that are most common. The bias appears when the
information that is most common to the decision maker is different than that of the information
that leads to the unbiased decision.

Example: When the people are asked about the capital city of Australia most of the people
abruptly answer Sydney. However, the capital city of Australia is Canberra. Since Sydney is the
most popular city of Australia, people use the ease of recalling the option Sydney while
answering.
In essence those information are cognitively available which are clear in the memory, has visual
and emotional meaning.

The availability heuristics is one of the major causes of egocentric judgment (Ross & Sicoly,
1979). For example: Most of the employees in the organization believe that their suggestions,
strategy or plan is more important than that of their colleagues. The bias arises from a tendency
to simply know more about own strategy and its outcomes than that of their colleague. Similarly
the employees weigh their contribution to be more than that of other employees due to the effect
of availability heuristics.

[Link] The anchoring and adjustment heuristics


Example: When a person is asked the establishment date of International Bank of Reconstruction
and Development, most people do not know the exact year of its establishment. But many people
do know when the Second World War ended. The end year of the world war will be taken as the
reference point of estimating the likely date of the establishment of the IBRD. The last year of
the world war two is taken as the judgmental anchor and then adjusting from that anchor in order
to arrive at an estimated value or likelihood is referred to as an anchoring adjustment. Tversky
and Kahneman (1974) first defined heuristics that allows people to make reasonable and
educated estimate of the day to day judgment. However it may lead to cognitive bias when the
anchored judgment is different than that of the correct alternative.

[Link] Representativeness Heuristic


Its creates bias when a person relies on the single case, event or information that is representative
to a particular category, group, phenomenon or the stereotype Tversky and Kahneman’s (1974).
Illustration: People tend to believe that in case of women the risk of breast cancer is greater than
that of the heart disease. In fact heart disease is more common in the women than that of the
breast cancer (Woloshin, Schwartz, Black, & Welch, 1999).

2.2.2 Overconfidence

Overconfidence results in majority of the cognitive bas. It is the tendency to put more weight on
one’s ability or judgment than is measurably justified. For example Most people rate above
average in the host of characteristics, capabilities, traits etc (Dunning, 2005).

Common questions

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Kahneman, Slovic, and Tversky identified three main types of heuristics: availability, anchoring and adjustment, and representativeness. Availability heuristics involve making decisions based on easily recalled information, leading to biases when common knowledge contradicts factual accuracy. Anchoring and adjustment heuristics occur when initial information (anchor) influences subsequent judgments, resulting in biased estimations. Representativeness heuristics involve generalizing from a small sample or stereotypical case to a broader category, often leading to errors when the sample is not truly representative .

Heuristics impact decision-making by simplifying the process through mental shortcuts, known as heuristics, allowing for faster decisions at the expense of thoroughness and accuracy. They are contrasted with optimization models, which use all relevant information to select the best alternative through a comprehensive approach. Heuristics, while being fast and efficient, often result in less optimal decisions as they ignore information necessary for unbiased decision-making .

Cognitive biases manifest in overconfidence within social and professional settings by causing individuals to overestimate their capabilities, knowledge, and performance compared to others. This bias is particularly prevalent in self-assessment where individuals assume their traits and abilities to be superior without sufficient justification, affecting both interpersonal relations and professional judgments. Overconfidence can lead to suboptimal decision-making and misalignment of self-perception with reality in both domains .

The availability heuristic leads to egocentric judgment within organizations by causing individuals to place more importance on their own contributions, plans, or strategies compared to others. This bias arises from the ease with which people recall their own efforts and ideas, leading them to consider their contributions as more significant. The familiarity and cognitive availability of one's initiatives results in overestimating their importance relative to those of colleagues .

The representativeness heuristic creates misconceptions regarding women's health risks by causing individuals to rely on stereotypical or highly visible examples when estimating the prevalence of health issues. For instance, many people assume that breast cancer is more common than heart disease among women because it is more frequently highlighted as a risk, despite heart disease actually being more prevalent. This reliance on representative but not necessarily accurate examples leads to skewed perceptions of risk .

The anchoring and adjustment heuristic affects estimation processes in uncertain environments by using initial reference points (anchors) to make subsequent judgments or estimates. For instance, if individuals are uncertain about a specific date, they might use a known related event date as a starting point and adjust their estimates from there. However, if the initial anchor is not accurate or relevant, the resulting adjustments will likely lead to skewed estimates, as adjustments are often insufficient to correct for initial biases .

Overconfidence plays a significant role in cognitive biases by leading individuals to overestimate their own abilities, judgments, and characteristics. This inflated self-perception causes people to rate themselves above average in various domains without measurable justification. The tendency to place undue weight on one's own competence contributes to a wide range of decision-making errors, reinforcing biases in assessments and actions .

People might incorrectly assume Sydney to be the capital city of Australia due to the availability heuristic, which leads them to rely on easily recalled and well-known information when making decisions. Since Sydney is Australia's most popular and internationally recognized city, it comes readily to mind, overshadowing Canberra, the actual capital. This quick access to familiar information can result in incorrect assumptions based on what is most cognitively available rather than factually accurate .

Heuristics simplify complex problem-solving by allowing individuals to quickly make decisions using mental shortcuts based on readily accessible information. This reduces the cognitive load and time required for decision-making. However, the trade-offs include potential biases and errors, as heuristics often ignore essential information for a comprehensive analysis, leading to less optimal decisions compared to those derived from a detailed and exhaustive approach such as optimization models .

The subsystem model impacts decision-making processes by delineating two cognitive subsystems: Subsystem 1, which is automatic and relies on heuristics, requiring little effort; and Subsystem 2, which is deliberate and rule-based, demanding more cognitive resources. Subsystem 1 facilitates quick decisions through simplifications and is often responsible for heuristic biases, whereas Subsystem 2 involves careful consideration and can lead to more accurate and reasoned decisions when employed .

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