Understanding Decision Making: Definitions, Heuristics, Models, and Influential Factors

Decision Making Heuristics

Decision-making heuristics are cognitive shortcuts that streamline the decision-making process by employing mental rules of thumb or simplified strategies.

What are Heuristics?

Imagine searching a specific treasure in vast land. Instead of meticulously examining each object, you might utilize cues like its age, material, or shape to narrow down your search.

Heuristics work similarly. They are mental shortcuts, rules of thumb, or simplified strategies that help us process information and make choices quickly and efficiently.

Definitions of Heuristics

Simon (1957) define A heuristic procedure is one that does not guarantee finding the best solution but does guarantee finding a good solution most of the time.

Amos Tversky and Daniel Kahneman (1974), “Heuristics are judgmental shortcuts that generally get us where we need to go—and quickly—but at the cost of sometimes sending us off course.”

Gigerenzer (1996) Heuristics are tools for handling uncertainty and making reasonable decisions with limited time and information.

Benefits of Heuristics:

• Speed and efficiency: In a fast-paced world, heuristics save us precious time and mental energy. They allow us to make decisions instantly, especially when faced with limited information or time constraints.
• Cognitive ease: Faced with an overload of options, heuristics reduce the complexity of the decision-making process, minimizing cognitive strain and fatigue.
• Adaptive solutions: Heuristics can be remarkably adaptable. We can modify and refine them based on experience and context, constantly improving their effectiveness.

Common Heuristics and Their Biases:

Heuristic approach is developed by Kahneman and Tversky, and gave Three classic decision making heuristics:

1. Representativeness heuristics:
2. Availability heuristics:
3. Anchoring and adjustment heuristics:

Decision-making-heuristics – Tversky & Kahneman

Several popular heuristics exist, each with its own strengths and potential biases:

1 Representativeness heuristic:

• The representativeness heuristic is a mental shortcut that we use to judge the likelihood of an event or the probability that something belongs to a certain category.
• We compare a situation to a prototype or stereotype to assess its probability. This can lead to biased judgments based on preconceived notions and social stereotypes.
• Imagine you’re at the zoo and see a furry animal with a long tail and pointy ears. You might guess it’s a fox, right? But what if it’s actually a raccoon?
• “match game.” We compare something new to what we already know and judge it based on how well it fits.
• Sample Size and Representativeness.- representativeness is such a compelling heuristic that we often fail to pay attention to sample size.
• However, this can lead to overlooking important details or assuming correlations that don’t exist.

Classical example – Suppose that you have a regular penny with one head (H) and one tail (T), and you toss it six times. Which outcome seems most likely, T H H T H T or H H H T T T? Most people choose T H H T H T (Teigen, 2004). After all, you know that coin tossing should produce heads and tails in random order, and the order T H H T H T looks much more random.

Examples:

• Judging a Person’s Profession: If we meet a person who is quiet, organized, and wears glasses, we might assume they’re a librarian because those traits match our stereotype of a librarian.
• Gambler’s Fallacy: After seeing a coin land on heads several times in a row, we might believe tails is “due” to come up next, even though each flip is independent.
• Investment Decisions: We might invest in a company because its CEO is charismatic and resembles a successful leader, even if other factors suggest caution.
• Judging a book by its cover 
• Assuming someone is a doctor because they wear a white coat
• Believing that a person who is well-dressed and articulate is more likely to be successful

Potential Biases:

• Overlooking Base Rates: We might ignore the actual probability of events and focus too much on similarity to prototypes.
• Stereotyping: We might make inaccurate judgments about individuals based on group stereotypes.
• Misunderstanding Randomness: We might see patterns where none exist, like in the gambler’s fallacy.

Using It Wisely:

• Be Aware of Its Influence: Recognize when you’re using the representativeness heuristic to avoid biases.
• Consider Base Rates: Pay attention to the actual probability of events, not just their similarity to prototypes.
• Challenge Stereotypes: Actively question your assumptions about groups and individuals.
• Seek Additional Information: Don’t rely solely on representativeness; consider other relevant factors.

2 Availability heuristic:

The availability heuristic is a mental shortcut that relies on how easily you can recall examples of something to judge its likelihood or frequency.

It’s based on the idea that events or objects that come to mind quickly are perceived as more common or probable than those that are harder to recall.

Recency and Availability; Familiarity and Availability; Recognition Heuristic (we place a higher value on something they recognize rather than something unfamiliar) has definate effect on availability heuristic.

1. Memory Search: When faced with a question about likelihood or frequency, your brain quickly searches through your memory for relevant examples.
2. Ease of Recall: The more easily examples come to mind, the more likely you are to judge the event or object as common or probable.
3. Vividness and Recency: Events that are emotionally charged, recent, or frequently discussed are more likely to be recalled easily, influencing your judgment.

Examples:

• Personal Experiences: After seeing news stories about car thefts, you might make a judgment that vehicle theft is more common, even though the actual rate has not changed. Your judgment is based on the ease of recalling the news stories, not on any real data about the prevalence of car theft.
• Influencing Investment Decisions: Investing in a company that’s been in the news frequently, even if it’s not the most financially sound choice.
• Worrying About Unlikely Dangers: Fearing sharks more than falling coconuts, even though coconut-related injuries are statistically more common.
• Underestimating Common Dangers: Underestimating the risk of heart disease or cancer because their symptoms and progression aren’t as readily available in memory.
• Marketing Influence: Being more likely to buy a product after seeing multiple ads for it, as it becomes more “available” in your mind.
• Overestimating Rare Risks: Believing plane crashes are more common than car accidents because plane crashes are often covered more vividly in the news.
• Underestimating Common Risks: Downplaying the risk of heart disease because you don’t personally know many people who have it.

Potential Issues:

• Biased Judgments: The availability heuristic can lead to inaccurate judgments, especially when the ease of recall is influenced by factors like media coverage, personal experiences, or recency.
• Overlooking Relevant Information: It can cause you to overlook more relevant statistical information or base rates.
• Susceptibility to Manipulation: It can be manipulated by marketing strategies that emphasize vivid examples or create a sense of urgency.

3 Anchoring and adjustment heuristics

• According to the anchoring and adjustment heuristic we begin with a first approximation, which serves as an anchor; then we make adjustments to that number, based on additional information (Mussweiler et al., 2004; Thaler & Sunstein, 2008; Tversky & Kahneman, 1982). Also known as anchoring effect.
• The anchoring heuristic is a cognitive bias that causes us to rely too heavily on the first piece of information we receive (the “anchor”) when making decisions.
• We rely heavily on the first piece of information we receive when making a decision, potentially neglecting other relevant data. This can lead to suboptimal choices, especially when dealing with manipulative pricing strategies.

How It Works:

1. Anchor Exposure: We encounter an anchor, often in the form of a number, suggestion, or initial information.
2. Anchoring Effect: The anchor sets a reference point in our minds, influencing our subsequent judgments and estimates.
3. Insufficient Adjustment: We tend to adjust our estimates away from the anchor, but often not enough to fully account for other relevant information.

Classical example –

Show Problem A to at least five friends, and show Problem B to at least five other friends. Ask the participants to estimate the answer within 5 seconds.
A. 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1
B. 1 × 2 × 3 × 4 × 5 × 6 × 7 × 8

Now tally the answers separately for the two problems, listing the answers from smallest to largest. Calculate the median for each problem; Problem A will have high median as compare to Problem B.

Examples:

• Negotiations/ bargaining : The first price offered in a negotiation often sets the anchor for the rest of the bargaining process.
• Salary Negotiations: The initial salary offer in a job negotiation can serve as an anchor, influencing the final salary agreed upon.
• Product Pricing: Retailers often use high anchor prices (e.g., “Was $200, now $100!”) to make a product seem like a bargain, even if the final price is still high.
• Estimation Tasks: When asked to estimate something like the height of a building or the population of a country, people often anchor their estimates on arbitrary numbers they’ve recently heard or seen.
• Charity Donations: Seeing a suggested donation amount on a form anchors your thinking, often leading to higher donations than if no anchor was presented.

Using Heuristics Wisely:

While heuristics can be powerful tools, their limitations must be acknowledged. To make informed decisions:

• Be aware of potential biases: Recognize the heuristic you’re relying on and its inherent biases. Actively seek out additional information and perspectives to counteract these biases.
• Consider the context: Not all heuristics are equally suited for every situation. Choose the heuristic that best aligns with the specific decision you’re facing.
• Combine with critical thinking: Heuristics shouldn’t replace in-depth analysis. Use them as a starting point, then critically evaluate your options before making a final decision.

4 Confirmation bias

This bias can lead individuals to selectively notice or remember information that supports what they already believe, while ignoring or dismissing information that contradicts their beliefs. As a result, people may maintain or strengthen their initial opinions, even when presented with evidence that challenges those beliefs.

Confirmation bias can affect various aspects of decision-making, problem-solving, and everyday judgments. For instance, in debates or discussions, individuals may cherry-pick information that supports their arguments while overlooking evidence that contradicts them. In research, scientists might unintentionally seek data that confirms their hypotheses, ignoring data that could challenge their theories.

Remedy for the confirmation bias: Try to explain why another person might hold the opposite view (Lilienfeld et al., 2009; Myers, 2002). In an ideal world, for example, the leaders of Country A should sincerely try to construct arguments against attacking Country B.

Recognizing confirmation bias is crucial because it can distort perceptions of reality and hinder objective decision-making. Overcoming this bias involves consciously seeking diverse perspectives, actively considering contradictory evidence, and being open to revising one’s beliefs based on credible information, even if it challenges pre-existing notions.

The Framing Effect

The framing effect demonstrates that the outcome of your decision can be influenced by two factors:

1. The background context of the choice and
2. The way in which a question is worded (or framed).

The background information and the wording of a question both play important roles in the Framing Effect (Kahneman and Tversky, 1984).

Background Information: Suppose participants are asked to evaluate the effectiveness of a new drug. If they are provided with positive background information about the drug’s success rates, such as its high efficacy in previous trials, they might be more inclined to perceive the drug favorably and be more likely to choose it, even if presented with potential side effects.

Wording of a Question: Consider a scenario where people are asked to choose between two insurance policies. If one policy is presented with a positive frame emphasizing the benefits of coverage (“This policy offers a 90% coverage rate”), while the other policy is presented negatively highlighting the deductibles (“This policy has a 10% deductible”), individuals might lean towards the positively framed policy despite both policies offering the same financial coverage.

In both instances, the background information and the wording of the question significantly influence individuals’ decisions, showcasing how subtle changes in information presentation can impact choices through the Framing Effect.