What Are Heuristics?

Introduction to Judgmental Heuristics:

When making decisions, people rely on a number of simplifying strategies (or rules of thumb), also called heuristics.Heuristics serve as a mechanism for coping with the complex environment surrounding our decisions.Heuristics reduce the effort people must put into making decisions by allowing them to examine fewer pieces of information, simplify the weights of different information, process less information, and consider fewer alternatives.Heuristics are generally helpful, but their use sometimes leads to severe errors.

Human minds generally recall instances of more frequent events more easily than rare events. The availability of information will often lead to accurate judgments; thus, this heuristic can be a very useful managerial decision-making strategy. On the other hand, the availability of information is also affected by factors unrelated to the judged event's objective frequency.

Most of our judgments follow an affective, or emotional, evaluation that occurs even before any higher-level reasoning take place. While these affective evaluations are often unconscious, people nonetheless use them as the basis of their decisions instead of engaging in a more complete analysis and reasoning process.  Example: Evidence suggests that juries decide penalties and awards based in large part on their feelings of outrage, rather than on a logical assessment of the harm created by the defendant.

The Mother of All Biases Overconfidence may be the mother of all biases in two different ways: Overconfidence has some of the most potent, pervasive, and pernicious effects of any of the biases; it has been blamed for wars, stock market bubbles, strikes, unnecessary lawsuits, and failure of corporate mergers and acquisitions. Overconfidence facilitates many of the other biases discussed below. If we were all appropriately humble about the quality of our judgments, we could more easily doublecheck our opinions and correct our flaws. Instead, we continue to believe that our views and judgments are correct, despite the considerable evidence of our own fallibility.

1. Individual judgment is bounded in its rationality we can better understand decision making by describing and explaining actual decisions than by focusing solely on prescriptive ("what would be rationally be done") decision analysis [Herbert Simon]. As Simon's work implies, the field of decision making can be roughly divided into several parts:

The rational model is based on a set of assumptions that prescribe how a decision should be made, rather than how a decision is made.

1. The prescriptive decision model is based on methods for making optimal decisions.

2. The descriptive model is used to consider how decisions are actually made.

3. Simon's bounded rationality framework views individuals as attempting to make rational decisions, and acknowledges that individuals often lack important information that would help define the problem, the relevant criteria, and so on:

4. Time and cost constrains limit the quantity and quality of available information.

5. Decision makers retain only a relatively small amount of information in their usable memory.

Intelligence limitations and perceptual errors constrain the ability of decision makers to accurately "calculate" the optimal choice from the universe of available alternatives.Together, these limitations prevent us from making the optimal decisions assumed by the rational model. The decisions that result typically overlook the full range of possible consequences. We tend to ‘to satisfice’: rather than examining all possible alternatives, we simply search until we find a satisfactory solution that will suffice because it is good enough.