# Heuristics and Biases in Decision Making Explained

Recognizing the flawed nature of your thinking is a bold first step to challenging it. “Heuristics” are straightforward rules of thumb that we develop based on past experiences. They are cognitive tools that help make quick decisions or judgments. Much like intuition, heuristics is a shortcut to making a decision. Essentially, it’s a more logical way of going from point A to point G, H, I, J, and sometimes even Z.

Our brains are incredible machines that process vast amounts of information. However, we often rely on mental shortcuts to cope with this complexity. These shortcuts, known as heuristics, help us make decisions more quickly. Unfortunately, they can also lead to cognitive biases, which are systematic errors in our thinking. This blog post will delve into common heuristics and biases and discuss how they impact our decision-making processes.

## What are good heuristics?

Heuristics can also be helpful in decision-making by simplifying complex information and allowing us to make quicker judgments. The best heuristics encapsulate helpful information in a way that is intuitive to remember and act upon but also specific to their context. Their power lies in their ability to induce people to take better actions. Here are some valuable heuristics for various decision-making situations:

1. The recognition heuristic: When faced with a choice between two alternatives, if one is recognized and the other is not, people often assume that the recognized option is better or more reliable. This heuristic can be helpful when limited information is available and recognition is a proxy for quality or relevance.
2. Take-the-best heuristic: In this decision-making approach, people compare alternatives based on a single most important attribute or criterion instead of considering all available information. This heuristic can be helpful when a quick decision is required, and the essential attribute strongly predicts the desired outcome.
3. Satisficing heuristic: Instead of searching for the optimal solution, people choose the first option that meets a minimum threshold or set of criteria (i.e., “good enough”). This heuristic can help in situations with time constraints or when the cost of searching for a better option outweighs the potential benefits.
4. Rule of thumb: General principles or guidelines that have proven effective in various situations can serve as heuristics. For example, “measure twice, cut once” is a rule of thumb in carpentry to avoid mistakes and waste.
5. The 80/20 rule (Pareto Principle): This heuristic suggests that 80% of outcomes or effects often result from 20% of causes or inputs. By focusing on the most impactful 20%, decision-makers can prioritize their efforts and resources more effectively.
6. Ockham’s razor: This heuristic states that the simplest one is often the best choice when faced with multiple competing explanations or hypotheses. By preferring more straightforward explanations, decision-makers can avoid getting lost in the complexity and make more efficient judgments.
7. The 2-minute rule: If a task can be completed in two minutes or less, do it immediately instead of postponing it. This heuristic can help with time management and productivity.

Remember that heuristics are not foolproof and can lead to biases or errors. However, in many situations, they can provide a practical approach to decision-making, especially when time and resources are limited or perfect solutions are unattainable.

## Cognitive Biases

List of cognitive biases:

• Availability heuristic
• Representativeness heuristic
• Anchoring and adjustment heuristic
• Confirmation bias
• Overconfidence bias
• Hindsight bias
• Loss aversion
• Sunk cost fallacy
• Fundamental attribution error
• Self-serving bias

## Availability heuristic

Imagine you are asked to estimate the likelihood of a specific event. Your mind might immediately recall-related examples or experiences that stand out. This is the availability heuristic at work. While helpful in some cases, it can also be misleading. Highly memorable events or recent occurrences may seem more likely than they are, leading to incorrect judgments.

## Representativeness heuristic

When determining the probability of an event or whether something belongs to a specific category, we often rely on the representativeness heuristic. This mental shortcut involves comparing the subject in question to a typical example. The more similar they are, the more likely we judge them to belong together. Regrettably, this can result in base-rate neglect, where we overlook the actual frequency of occurrences in the population.

## Anchoring and adjustment heuristic

We all make estimates and decisions. One standard method is starting from an initial value, or anchor, and making adjustments from there. This is the anchoring and adjustment heuristic. In many cases, though, we fail to adjust sufficiently. Consequently, the initial anchor can have an outsized impact on our final judgment or decision.

## Confirmation bias

We naturally favor evidence that supports our pre-existing beliefs when presented with new information. Confirmation bias is the name for this tendency. We seek out, interpret, and remember information that aligns with our views while ignoring or downplaying contradictory evidence. This can result in a distorted understanding of reality.

## Overconfidence bias

Feeling confident in our abilities is generally a good thing. Nonetheless, sometimes we go too far. The overconfidence bias refers to our tendency to overestimate our knowledge, skills, or the accuracy of our predictions. This can lead to poor decisions based on unrealistic expectations. This happens when ignorance creates confidence when competence, knowledge, and experience are absent.

## Hindsight bias

After an event occurs, it’s not uncommon to believe we “knew it all along.” This is known as hindsight bias. Unfortunately, this can cause us to overestimate our predictive abilities and may even result in poor decision-making in the future.

Several factors contribute to the development of hindsight bias:

1. Cognitive factors: Our brain reconstructs memories and simplifies complex information to create coherent narratives. When we look back at past events, we tend to focus on the information supporting the outcome while dismissing or downplaying information contradicting it. This selective recall and memory distortion can make past events seem more predictable than they were.
2. Motivational factors: People generally want to believe they are knowledgeable and can predict or understand the world around them. Hindsight bias serves this desire by creating an illusion of predictability and control. By convincing ourselves that we “knew it all along,” we maintain a positive self-image and protect our self-esteem.
3. Social factors: Sometimes, hindsight bias may arise from social influences. People tend to conform to the opinions or expectations of others, especially if they perceive those individuals as more knowledgeable or authoritative. If a group agrees that a particular outcome is predictable, individuals within the group may adopt this belief as well, even if they did not initially think so.

Overall, hindsight bias stems from cognitive, motivational, and social factors. Recognizing this bias can help improve decision-making, reduce overconfidence in our predictive abilities, and promote more objective evaluations of past events.

## Loss aversion

We often exhibit an asymmetric response to potential gains and losses. Loss aversion is the term for our tendency to be more sensitive to potential losses than equivalent gains. Consequently, we may act risk-averse when evaluating potential gains while engaging in risk-seeking behavior to avoid losses. In the markets, this causes traders and investors to hold losing positions and hope the price reverses back to even because they hate to lock in a loss.

## Sunk cost fallacy

Humans tend to stick with decisions or projects in which we’ve already invested resources. The sunk cost fallacy describes our inclination to continue these investments, even when it’s no longer rational. This can waste valuable time, money, or effort on unproductive pursuits. People don’t want to lose the previous time or money they have invested in something, so they will keep wasting more time and money to try to get their original investment back.

## Fundamental attribution error

When observing others’ behavior, we often place too much emphasis on their personality traits and not enough on situational factors. This is called the fundamental attribution error. Such an error can lead to misunderstandings and incorrect assumptions about the motivations behind people’s actions.

## Self-serving bias

We like to think highly of ourselves. The self-serving bias is our tendency to attribute successes to our skills and efforts while blaming external factors for our failures. This helps maintain a positive self-image but can hinder personal growth and learning.

## Key Takeaways

• Heuristics are mental shortcuts that can simplify decision-making but may also lead to cognitive biases.
• The availability heuristic can cause us to overestimate the likelihood of memorable or recent events.
• The representativeness heuristic can result in base-rate neglect and incorrect judgments about probabilities.
• The anchoring and adjustment are heuristics that may lead to disproportionate influence from initial values.
• Confirmation bias can distort our understanding of reality by favoring information that supports our pre-existing beliefs.
• Overconfidence bias can cause poor decisions based on unrealistic expectations.
• Hindsight bias may lead to an overestimation of our predictive abilities.
• Loss aversion can result in risk-averse behavior for gains and risk-seeking behavior for losses.
• The sunk cost fallacy can lead to wasting resources on unproductive pursuits.
• The fundamental attribution error may cause misunderstandings about others’ motivations.
• Self-serving bias can hinder personal growth and learn by maintaining a positive self-image at the expense of acknowledging mistakes.

## Conclusion

In summary, heuristics and biases are essential parts of our decision-making processes. While these mental shortcuts can help us navigate the complexities of daily life, they can also lead to systematic errors in our thinking. Understanding and recognizing these heuristics and biases can improve our decision-making skills, develop a more accurate perception of reality, and ultimately make better choices for ourselves and those around us. Remember these concepts as you navigate your personal and professional life, and strive to make more informed and unbiased decisions.