Critical Thinking

(Module 3)
Professor Deepa Mani
Deputy Dean, Executive Education and Digital
Learning
Faculty, Information Systems
Indian School of Business

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Module 3: Heuristics
This module discusses three heuristics – anchoring and adjustment,
availability and representativeness. By understanding these
cognitive processes, we can make more informed and effective
decisions that lead to optimal outcomes. Completing the module
enables learners to:
• Recognise the influence of cognitive structures on your
decision making
• Recognise that heuristics play an important role in
intuitive thinking
• Recognise the impact of heuristics on different social
phenomena
• Apply the right decision frameworks to make decisions in
your professional or personal life

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Introduction to Heuristics
Heuristics are mental shortcuts or rules of thumb used while solving problems and making decisions.

Heuristics

Anchoring and Adjustment Availability Representativeness

The tendency for people to A judgemental heuristic used to A cognitive shortcut used to make
estimate a solution by starting from assess the frequency or probability judgements about probabilities
an initial value that is then adjusted of an event by the ease with which by comparing an object or event
to yield a final answer. instances or occurrences can be to our mental prototype of the
• Biased toward the initial values remembered. category to which it belongs.
and can significantly impact • Affects people's estimation of • Leads to errors if the mental
decision making risk, behaviour and decision prototype is not accurate
• Impacts problem-solving and making • Often ignores the base
decision making, including how • Impacts the effectiveness of a rate information
people understand and assess search set
prices

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Anchoring and Adjustment
Anchoring plays an important role in business by changing the value we ascribe to different objects, affecting how prices are
perceived by and used in negotiations by customers and even influencing everyday choices and decisions.
Anchoring is an effective tool and has many benefits, such as:
• Anchoring is used Example
o In creating a bargain perception and increase consumer
demand Write down the last Would you pay that
o To launch negotiations from an advantageous statement of
two digits of your amount in dollars for a
value, irrespective of whether the position is rational or arbitrary social security number fancy bottle of wine?
• Opening offers are anchors that have the psychological effect of
framing what each side will view as a possible outcome of the
ensuing negotiation
• Employees in high anchor conditions select high performance goals
and demonstrate greater performance increases
Avoiding Pitfalls
The highest quintile of social security
While making decisions: numbers were willing to pay 3-4 times as
• Explore the full option set much for the exact same good.
• Imagine another extreme anchor
• Consider all information and options
• Avoid basing your selection on an anchor
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Availability Heuristic
The availability heuristic has significant implications for decision making, such as the effect of recent information on strategic decisions,
the inability of managers to recognise and respond to unfamiliar change and the over-crediting or over-punishing of CEOs, among other
impacts.

Kahneman’s Focusing Illusion

The Fortune Cookie Maxim – ‘Nothing in life is as important as you think it is while you are thinking about it.’

Avoiding Pitfalls
Example: The availability heuristic leads to judgement errors on account of the
To avoid falling prey to the availability heuristic: effectiveness of a search set, resulting in you getting the 1st question right but the
• Consider all factors that influence a decision 2nd question wrong.
• Check if the information is influenced by
salient pieces of information Does English have more words that
Which country started more wars on
start with the letter K or more words
• Determine if the information is truly relevant aggression? Germany or Switzerland?
that have K as the third letter?
rather than just easily available
Ans: There's nearly 3 times as many
Ans: Germany words that have K as the third letter
than words that start with the letter K.

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Representativeness Heuristic
The representativeness heuristic is a mental shortcut that we use when we're not good at calculating odds.
Instead of trying to estimate the odds of something, we ask ourselves how well it matches our prototype or stereotype of that thing.
It does not consider prior probability or base rate frequency of outcomes.

Avoiding Pitfalls How Does It Work?

Judgement of probability by representativeness:
• Leads to serious errors because representativeness is not The Rule
influenced by prior probability If it seems like 'X', then it must
• Could potentially influence your thought process be 'X'
• Can have several other such factors that influence probabilities,
but have no effect on representativeness The Problem
We ignore how often 'X' actually
occurs. i.e the 'Base rate'

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