Notes on Heuristics, Bias, and Time Preference

3.1 Understanding Heuristics

Heuristics are mental shortcuts or rules of thumb that people use to make decisions quickly and efficiently, especially when faced with complex information or limited time. While they often lead to satisfactory solutions, they can also result in systematic errors or biases.

3.2 Key Characteristics of Heuristics

• Cognitive Efficiency: They reduce the cognitive load required for decision-making.

• Speed: They enable rapid judgments and decisions.

• Approximation: They often provide good enough solutions rather than optimal ones.

• Context-Dependent: Their effectiveness can vary significantly depending on the situation.

3.3 Types of Heuristics

Several prominent heuristics have been identified and studied extensively:

1. Availability Heuristic

   • Definition: People estimate the probability or frequency of an event based on how easily examples or instances come to mind.

   • Example: After seeing news reports about plane crashes, one might overestimate the risk of flying, even though statistically, car travel is more dangerous. This is because vivid and recent instances of plane crashes are more "available" in memory.

2. Representativeness Heuristic

   • Definition: People judge the probability of an event by how similar it is to a prototype or stereotype in their mind, often ignoring statistical probabilities or base rates.

   • Example: Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice and also participated in anti-nuclear demonstrations. Which is more probable? a. Linda is a bank teller. b. Linda is a bank teller and is active in the feminist movement.

     • Many people choose (b), despite it being less probable because the description of Linda is more "representative" of a feminist bank teller than just a bank teller (conjunction fallacy).

3. Anchoring and Adjustment Heuristic

   • Definition: Individuals rely too heavily on an initial piece of information (the "anchor") when making subsequent judgments. Later information is then adjusted from this anchor, often insufficiently.

   • Example: If asked to estimate the global average temperature, someone might be influenced by a high or low number suggested previously, even if that number is arbitrary. If an initial anchor of 200 degrees Celsius is given, subsequent estimates for the average temperature of the Earth's surface would likely be higher than if an anchor of 0 degrees Celsius was provided.

4. Affect Heuristic

   • Definition: People make decisions based on their current emotions or "affect" associated with a stimulus, rather than a thorough evaluation of risks and benefits.

   • Example: If a person feels positive about new technology, they might overlook or downplay its potential risks, relying on their good feelings rather than objective data.

3.4 Biases Associated with Heuristics

While heuristics are adaptive, they can lead to predictable cognitive biases:

• Confirmation Bias: Tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.

• Hindsight Bias: The tendency to perceive events that have already occurred as having been more predictable than they actually were before they happened (e.g., "I knew it all along").

• Framing Effect: Drawing different conclusions from the same information, depending on how the information is presented or "framed."

3.5 Importance in Decision Making

Recognizing heuristics is crucial for understanding human judgment and decision-making. By being aware of these mental shortcuts and their potential biases, individuals and organizations can strive to make more rational and informed decisions.