DOCSLIB.ORG

Availability Heuristic Will Affect Decision-Making and Result in Bias

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Availability Heuristic Will Affect Decision-Making and Result in Bias 2017 3rd International Conference on Management Science and Innovative Education (MSIE 2017) ISBN: 978-1-60595-488-2 Availability Heuristic Will Affect Decision-making and Result in Bias SIJIA MENG ABSTRACT Heuristic is a strategy that allows us to make decision without complicate information gathering and analyzing. Availability heuristic is a type of heuristic that concentrates on retrieving information from memory. However, there are four factors that may induce bias from the use of availability heuristic. A model will be established in this paper to assess the possibility of bias occurring in decision under availability heuristic. The existence of availability heuristic is also against the traditional financial market assumption. KEYWORDS Availability Heuristic; bias; financial market. INTRODUCTION Making decisions without complex information gathering and systematic analysis is a strategy called heuristic which is unknowingly utilized by many people. Even though it may not be optimal or perfect, it is usually sufficient for the immediate goals. It could be described as mental shortcut when people assess the likelihood for an uncertain event. Tversky and Kahneman indicated that these heuristics will lead to bias and errors when people make decisions even though they are helpful in some general cases [1]. They categorized these biases into three main types, namely representative heuristic, anchoring and adjustment, and availability heuristic. Representative heuristic means that people have a tendency to make decision of an uncertain event by considering the representative of it in similar cases. Two primary bias in representative heuristic are base rate neglect and sample size neglect [1]. Base rate neglect is that people mistakenly conclude the likelihood of this event without taking account of all relevant information as they rely on the similar and salient case or process which had happened in the past. Besides, the wrong choice of sample size compared to parent population will also lead to errors in analysis and assessment of this uncertain event. Therefore, even though representative heuristic will help people to make easy computation in certain events, it will lead to unwanted biases as people are too confident with their ability to predict the possibility of an event accurately [2]. Anchoring and adjustment implies that people will anchor an information as reference and make adjustments until they reach the final estimation. The piece of information used may be obtained from certain value or past event. Therefore, the initial value of this estimation is a historical data which may not be accurate for _________________________________________ Sijia Meng, Department of Business and Economics, Monash University, Caulfield East VIC 3145, Australia, [email protected]. 267 estimation. Besides, this anchor prevents people to adjust their estimation with new information and therefore causing the forecast closely related to the original data. In addition to this, insufficient adjustments will cause errors in estimations as people will stop to make continuous adjustments since they have reached a plausible result [3]. Therefore, when people make decisions based on an anchor, they should be aware of the existence of bias in this kind of analysis and understand the possible effects. Availability heuristic describes that people tend to use instances or examples they can recall easily in a short time to evaluate the likelihood of an event. Even though availability is useful to assess the frequency of an event, it’s still affect by four main factors which are irretrievability, imaginability, illusory correlation and the effectiveness of search set [1]. As a consequence, people relying on availability heuristic will result in estimation bias. This paper will focus on analyzing of availability heuristic. Section two will show some evidence on how availability heuristic influence people’s decision making and four factors that will affect it. A simple model will be constructed in section 3 to describe the relationship between availability heuristic and possibility of errors or bias occurred under this method. Section 4 will discuss how availability heuristic challenges the tradition method of competitive market and how this model established in section three could be used in assessing decision-making in financial market. EVIDENCE AND LITERATURE REVIEW As mentioned in section 1, availability heuristic is a common type of cognitive style to assess the relative probability or frequency of an event rely on past experience and memory. Availability heuristic shows how these easily recalled examples will affect the judgement on frequency of that event. There are several evidences that supports the existence of availability heuristic. Khan, Qureshi and Ghafoor states that availability heuristic will significantly influence investor’s buying decisions as people tend to choose companies with heavy advertisements [4]. Franklin Templetion Investment indicated most investors expected market index S&P 500 will either be down or flat in the years 2009, 2010 and 2011 as financial market just suffered from Global Financial Crisis (GFC) [5]. However, S&P actually had good performance during that time period. The reason of this expectation error is that investors had deep memories of GFC and estimated the market will have relative performance in next few years. Besides, Folkes showed availability heuristic will affect consumers’ judgement of a product performance [6]. For example, if consumers cannot taste some certain food products, they will be more likely to choose a product with awards for their first time. Therefore, these evidences proved the availability heuristic’s existence and that it will lead to assessment bias by relying on this mental shortcut. There are four main reasons which would result in predictable errors. The first factor that leads to the bias is the retrievability of instances [1]. People usually think that the frequency of a certain event or instance is much higher when the similar or related past events is easily retrievable. This bias is shown in a study done by Lichtenstein where, on average, participants estimated that deaths caused by vehicle accidents are 350 times more frequent than deaths caused by diabetes while the actual statistic shows only 1.5 times more frequent [7]. This is due to the fact that vehicular accidents are far more easily retrievable comparing to deaths by diabetes because media coverage is far greater in accidents. The media bombardment of 268 accidents causes people to recall these incidents easily thus made a wrong prediction fortifies the existence of retrievability of instances bias. The biases of imaginability is a heuristic when someone needs to assess a situation based on a given rules or certain tasks instead of their memory. Tversky and Kahneman asked a number of test subjects that given 10 people to form a committee consisting k people, how many possible combinations of different groups can be formed when k=2,3,4,…,8 [1]. Without complicated calculations, the subjects can only imagine the different combinations of the committee for when k equals each numbers. This makes the number of combinations seems to be much larger when k=2 than k=8 because it is much easier to imagine different combinations of committee members when k=2. The average estimation taken from the test subjects are 70 combinations for k=2 and 20 combinations for k=8 while the actual answer is 45 in both cases. This experiment successfully shown how imaginability causes unwanted biases in heuristics. The third factor is illusory correlation which refers to the phenomenon that people could perceive a relationship between two events or variables even though there are unrelated to each other. This idea was raised by Chapman and Chapman who found people tend to overestimate the relationship if there is unusual information exist [8]. For example, according to tylervigen.com, the US spending on science, space, and technology have 99.79% correlation with the number of suicides by hanging, strangulation, and suffocation from the year 1999 to the year 2009 [9]. This information can create an illusion for some people that the two are actually related to each other. However, there are absolutely no relationship between the two events even though they maintain such a high correlation for 10 years. The final factor is called the effectiveness of search set. When asked to filter out a massive set of data or information based on a certain rule, the amount of occurrence of a certain objects or instances are linked to the effectiveness of the search. Something easy to search for makes people felt like it is much more abundance. For example, which of the following have more words, a word starting with the letter ‘r’ or a word with an ‘r’ in the third letter? According to Tversky and Hahnemann, people approach this question by recalling words in both categories to compare [1]. However, most of them judges the frequency by the ease of recalling the words instead of the actual frequencies. Because they can search for the words starting with ‘r’ much more easily, they think that words starting with ‘r’ is much more abundant when the truth is the opposite. This proves that the effectiveness of searching can cause bias in heuristic judgments. Everyone has a tendency to maximize their own benefits during decision making instances. However, due to the possibility of biases occurred under availability heuristics thinking method, their decisions usually will not be the most optimized or perfect ones. MODEL Availability heuristic is some sort of mental shortcut in certain decision making situation. Even though this may be useful in some situation, there is still a possibility that it could lead to biases. This section will be focusing on constructing a model that can determine the probability of the existence of availability heuristic bias in a particular situation. However, in order to effectively utilize the model, an assumption 269 must be made that no factors other than availability heuristic will be able to cause bias in said situation.
Load more

Recommended publications
  • The Availability Heuristic
    CHAPTER 11 THE AVAILABILITY HEURISTIC According to Amos Tversky and Daniel Kahneman (1974, p. 1127), the availability heuristic is a rule of thumb in which decision makers "assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind." Usually this heuristic works quite well; all things being equal, common events are easier to remember or imagine than are uncommon events. By rely­ ing on availability to estimate frequency and probability, decision mak­ ers are able to simplify what might otherwise be very difficult judg­ ments. As with any heuristic, however, there are cases in which the general rule of thumb breaks down and leads to systematic biases. Some events are more available than others not because they tend to occur frequently or with high probability, but because they are inherently easier to think about, because they have taken place recently, because they are highly emotional, and so forth. This chapter examines three general questions: (1) What are instances in which the availability heuristic leads to biased judgments? (2) Do decision makers perceive an event as more likely after they have imagined it happening? (3) How is vivid information dif­ ferent from other information? AVAILABILITY GOES AWRY Which is a more likely cause of death in the United States-being killed by falling airplane parts or by a shark? Most people rate shark attacks as more probable than death from falling airplane parts (see Item #7 of the Reader Survey for your answer). Shark attacks certainly receive more publicity than do deaths from falling airplane parts, and they are far easier to imagine (thanks in part to movies such as Jaws).
    [Show full text]
  • Nudge Theory
    Nudge Theory http://www.businessballs.com/nudge-theory.htm Nudge theory is a flexible and modern concept for: • understanding of how people think, make decisions, and behave, • helping people improve their thinking and decisions, • managing change of all sorts, and • identifying and modifying existing unhelpful influences on people. Nudge theory was named and popularized by the 2008 book, 'Nudge: Improving Decisions About Health, Wealth, and Happiness', written by American academics Richard H Thaler and Cass R Sunstein. The book is based strongly on the Nobel prize- winning work of the Israeli-American psychologists Daniel Kahneman and Amos Tversky. This article: • reviews and explains Thaler and Sunstein's 'Nudge' concept, especially 'heuristics' (tendencies for humans to think and decide instinctively and often mistakenly) • relates 'Nudge' methods to other theories and models, and to Kahneman and Tversky's work • defines and describes additional methods of 'nudging' people and groups • extends the appreciation and application of 'Nudge' methodology to broader change- management, motivation, leadership, coaching, counselling, parenting, etc • offers 'Nudge' methods and related concepts as a 'Nudge' theory 'toolkit' so that the concept can be taught and applied in a wide range of situations involving relationships with people, and enabling people to improve their thinking and decision- making • and offers a glossary of Nudge theory and related terms 'Nudge' theory was proposed originally in US 'behavioral economics', but it can be adapted and applied much more widely for enabling and encouraging change in people, groups, or yourself. Nudge theory can also be used to explore, understand, and explain existing influences on how people behave, especially influences which are unhelpful, with a view to removing or altering them.
    [Show full text]
  • CHALK TALK Thinking About Thinking: Medical Decision Making Under the Microscope Christiana Iyasere, MD, and Douglas Wright, MD, Phd
    SGIM FORUM 2011; 34(11) CHALK TALK Thinking about Thinking: Medical Decision Making Under the Microscope Christiana Iyasere, MD, and Douglas Wright, MD, PhD Drs. Iyasere and Wright are faculty in the Inpatient Clinician Educator Service of the Department of Medicine at Massachusetts General Hospital in Boson, MA. ase: A 36-year-old African-Ameri- athletic—he graduated from college than 10 seconds and says “20,160” C can woman, healthy except for with a degree in physics and has before moving breezily along with treated hypothyroidism, visits you in completed several triathlons. Neil is a her coffee. Having Katrina’s input, are clinic complaining of six months of fa- veteran of the US Navy, where he you tempted to change your answer tigue and progressive shortness of served as fleet naval aviator and land- to questions 3a and 3b? Go ahead, breath with exertion. You thoroughly ing signal officer. Is Neil more likely to admit it. Aren’t you now more confi- interview and examine the patient. be: a) a librarian or b) an astronaut? dent that the correct answer is that Physical examination reveals conjunc- Question 2: Jot down a list of the product is closest to 20,000? tival pallor and dullness to percussion English words that begin with the let- Question 5: You have known one third of the way up both lung ter “r” (e.g. rooster). Next, jot down your medical school roommate Jus- fields. Something tells you to ask her a list of words that have an r in the tice for four years.
    [Show full text]
  • Mitigating Cognitive Bias and Design Distortion
    RSD2 Relating Systems Thinking and Design 2013 Working Paper. www.systemic-design.net Interliminal Design: Mitigating Cognitive Bias and Design Distortion 1 2 3 Andrew McCollough, PhD , DeAunne Denmark, MD, PhD , and Don Harker, MS “Design is an inquiry for action” - Harold Nelson, PhD Liminal: from the Latin word līmen, a threshold “Our values and biases are expressions of who we are. It isn’t so much that our prior commitments disable our ability to reason; it is that we need to appreciate that reasoning takes place, for the most part, in settings in which we are not neutral bystanders.” - Alva Noe In this globally interconnected and information-rich society, complexity and uncertainty are escalating at an unprecedented pace. Our most pressing problems are now considered wicked, or even super wicked, in that they commonly have incomplete, continuously changing, intricately interdependent yet contradictory requirements, urgent or emergency status, no central authority, and are often caused by the same entities charged with solving them (Rittel & Webber, 1973). Perhaps similar to philosopher Karl Jaspers’ Axial Age where ‘man asked radical questions’ and the ‘unquestioned grasp on life was loosened,’ communities of all kinds now face crises of “in-between”; necessary and large-scale dismantling of previous structures, institutions, and world-views has begun, but has yet to be replaced. Such intense periods of destruction and reconstruction, or liminality, eliminate boundary lines, reverse or dissolve social hierarchies, disrupt cultural continuity, and cast penetrating onto future outcomes. Originating in human ritual, liminal stages occur mid-transition, where initiates literally "stand at the threshold" between outmoded constructs of identity or community, and entirely new ways of being.
    [Show full text]
  • Cognitive Biases Potentially Affecting Judgment of Global Risks Forthcoming in Global Catastrophic Risks, Eds
    Cognitive biases potentially affecting judgment of global risks Forthcoming in Global Catastrophic Risks, eds. Nick Bostrom and Milan Cirkovic Draft of August 31, 2006. Eliezer Yudkowsky ([email protected]) Singularity Institute for Artificial Intelligence Palo Alto, CA Introduction1 All else being equal, not many people would prefer to destroy the world. Even faceless corporations, meddling governments, reckless scientists, and other agents of doom, require a world in which to achieve their goals of profit, order, tenure, or other villainies. If our extinction proceeds slowly enough to allow a moment of horrified realization, the doers of the deed will likely be quite taken aback on realizing that they have actually destroyed the world. Therefore I suggest that if the Earth is destroyed, it will probably be by mistake. The systematic experimental study of reproducible errors of human reasoning, and what these errors reveal about underlying mental processes, is known as the heuristics and biases program in cognitive psychology. This program has made discoveries highly relevant to assessors of global catastrophic risks. Suppose you're worried about the risk of Substance P, an explosive of planet-wrecking potency which will detonate if exposed to a strong radio signal. Luckily there's a famous expert who discovered Substance P, spent the last thirty years working with it, and knows it better than anyone else in the world. You call up the expert and ask how strong the radio signal has to be. The expert replies that the critical threshold is probably around 4,000 terawatts. "Probably?" you query. "Can you give me a 98% confidence interval?" "Sure," replies the expert.
    [Show full text]
  • Heuristics & Biases Simplified
    University of Pennsylvania ScholarlyCommons Master of Behavioral and Decision Sciences Capstones Behavioral and Decision Sciences Program 8-9-2019 Heuristics & Biases Simplified: Easy ot Understand One-Pagers that Use Plain Language & Examples to Simplify Human Judgement and Decision-Making Concepts Brittany Gullone University of Pennsylvania Follow this and additional works at: https://repository.upenn.edu/mbds Part of the Social and Behavioral Sciences Commons Gullone, Brittany, "Heuristics & Biases Simplified: Easy to Understand One-Pagers that Use Plain Language & Examples to Simplify Human Judgement and Decision-Making Concepts" (2019). Master of Behavioral and Decision Sciences Capstones. 7. https://repository.upenn.edu/mbds/7 The final capstone research project for the Master of Behavioral and Decision Sciences is an independent study experience. The paper is expected to: • Present a position that is unique, original and directly applies to the student's experience; • Use primary sources or apply to a primary organization/agency; • Conform to the style and format of excellent academic writing; • Analyze empirical research data that is collected by the student or that has already been collected; and • Allow the student to demonstrate the competencies gained in the master’s program. This paper is posted at ScholarlyCommons. https://repository.upenn.edu/mbds/7 For more information, please contact [email protected]. Heuristics & Biases Simplified: Easy ot Understand One-Pagers that Use Plain Language & Examples to Simplify Human Judgement and Decision-Making Concepts Abstract Behavioral Science is a new and quickly growing field of study that has found ways of capturing readers’ attention across a variety of industries. The popularity of this field has led to a wealth of terms, concepts, and materials that describe human behavior and decision making.
    [Show full text]
  • A Disinformation-Misinformation Ecology: the Case of Trump Thomas J
    Chapter A Disinformation-Misinformation Ecology: The Case of Trump Thomas J. Froehlich Abstract This paper lays out many of the factors that make disinformation or misinformation campaigns of Trump successful. By all rational standards, he is unfit for office, a compulsive liar, incompetent, arrogant, ignorant, mean, petty, and narcissistic. Yet his approval rating tends to remain at 40%. Why do rational assessments of his presidency fail to have any traction? This paper looks at the con- flation of knowledge and beliefs in partisan minds, how beliefs lead to self-decep- tion and social self-deception and how they reinforce one another. It then looks at psychological factors, conscious and unconscious, that predispose partisans to pursue partisan sources of information and reject non-partisan sources. It then explains how these factors sustain the variety and motivations of Trump supporters’ commitment to Trump. The role of cognitive authorities like Fox News and right-wing social media sites are examined to show how the power of these media sources escalates and reinforces partisan views and the rejection of other cognitive authorities. These cognitive authorities also use emotional triggers to inflame Trump supporters, keeping them addicted by feeding their anger, resentment, or self-righteousness. The paper concludes by discussing the dynamics of the Trump disinformation- misinformation ecology, creating an Age of Inflamed Grievances. Keywords: Trumpism, disinformation, cognitive authority, Fox News, social media, propaganda, inflamed grievances, psychology of disinformation, Donald Trump, media, self-deception, social self-deception 1. Introduction This paper investigates how disinformation-misinformation campaigns, particularly in the political arena, succeed and why they are so hard to challenge, defeat, or deflect.
    [Show full text]
  • Wishful Thinking About the Future: Does Desire Impact Optimism? Zlatan Krizan1* and Paul D
    Social and Personality Psychology Compass 3/3 (2009): 227–243, 10.1111/j.1751-9004.2009.00169.x WishfulBlackwellOxford,SPCOSocial1751-9004©Journal16910.1111/j.1751-9004.2009.00169.xMarch0227???243???Original 2009 and2009 Thinking UKTheCompilationArticle Publishing Personality Authors ©Ltd Psychology2009 Blackwell Compass Publishing Ltd. Wishful Thinking about the Future: Does Desire Impact Optimism? Zlatan Krizan1* and Paul D. Windschitl2 1 Iowa State University 2 University of Iowa Abstract The notion that desire for an outcome inflates optimism about that outcome has been dubbed the desirability bias or wishful thinking. In this paper, we discuss the importance of distinguishing wishful thinking from the more general concept of motivated reasoning, and we explain why documenting overoptimism or correla- tions between preferences and optimism is not sufficient to infer a desirability bias. Then, we discuss results from a review and meta-analysis of the experimental litera- ture on wishful thinking. These findings, in conjunction with more recent work, not only highlight important moderators and mediators of the desirability bias but also point out limitations of the empirical research on the bias. These results also reveal an important difference between how likelihood judgments and discrete outcome predictions respond to desirability of outcomes. We conclude by presenting avenues for future research useful for understanding wishful thinking’s manifesta- tion in everyday environments and its integration with related phenomena. —A soon-to-be bride and groom who hope the weather will cooperate on their wedding day. —An Illinois grade-schooler who thinks it would be ‘pretty cool’ if Chicago was indeed selected as the host city for the 2016 Olympics.
    [Show full text]
  • The Future of Global Affairs Managing Discontinuity, Disruption and Destruction
    The Future of Global Affairs Managing Discontinuity, Disruption and Destruction Edited by Christopher Ankersen · Waheguru Pal Singh Sidhu Foreword by Helen Clark and Vera Jelinek DOWNLOAD CSS Notes, Books, MCQs, Magazines www.thecsspoint.com Download CSS Notes Download CSS Books Download CSS Magazines Download CSS MCQs Download CSS Past Papers The CSS Point, Pakistan’s The Best Online FREE Web source for All CSS Aspirants. Email: [email protected] BUY CSS / PMS / NTS & GENERAL KNOWLEDGE BOOKS ONLINE CASH ON DELIVERY ALL OVER PAKISTAN Visit Now: WWW.CSSBOOKS.NET For Oder & Inquiry Call/SMS/WhatsApp 0333 6042057 – 0726 540141 Join CSS Point Forum Today Discuss, Learn and Explore The World of CSS www.csspoint.com.pk For any Query, Please Call/WhatsApp 03336042057 - 0726540141 ENGLISH PRECIS & COMPOSITION HAFIZ KARIM DAD CHUGTAI For Order Call/WhatsApp 03336042057 - 0726540141 The Future of Global Affairs “The Future of Global Affairs is an exciting and balanced contribution to the debate about the potential trajectory of a world in flux. Tinged more with concern than utopian optimism, this volume captures a panoramic view of our cacophonous and disorderly world that is on the verge of disequilibrium and potential destruction unless key political actors, institutions, and processes can find a way to adapt global affairs to an increasingly plurilateral and intermestic era. A must-read for serious IR scholars; written in a way that is understandable to the lay person.” —W. Andy Knight, Ph.D., FRSC, University of Alberta “What is the future of the state? Is multilateralism overrated as an answer to the diverse ills plaguing the global system? How might climate change disrupt geopolitical alliances that have been essential to peace in different regions of the world? Inspired by these and other urgent questions, this simultaneously illuminating and profoundly unsettling book traces the contours of the ascendant geopolitics, illustrating how one class of events can have contrasting resonances and implications around the world.
    [Show full text]
  • Cognitive Biases in Fitness to Practise Decision-Making
    ADVICE ON BIASES IN FITNESS TO PRACTISE DECISION-MAKING IN ACCEPTED OUTCOME VERSUS PANEL MODELS FOR THE PROFESSIONAL STANDARDS AUTHORITY Prepared by: LESLIE CUTHBERT Date: 31 March 2021 Contents I. Introduction ................................................................................................. 2 Background .................................................................................................. 2 Purpose of the advice.................................................................................... 3 Summary of conclusions ................................................................................ 4 Documents considered .................................................................................. 4 Technical terms and explanations ................................................................... 5 Disclaimer .................................................................................................... 5 II. How biases might affect the quality of decision-making in the AO model, as compared to the panel model .............................................................................. 6 Understanding cognitive biases in fitness to practise decision-making ............... 6 Individual Decision Maker (e.g. a Case Examiner) in AO model ......................... 8 Multiple Case Examiners .............................................................................. 17 Group Decision Maker in a Panel model of 3 or more members ....................... 22 III. Assessment of the impact of these biases,
    [Show full text]
  • Psychology 36. Thinking, Judgment, and Decision Making Barry Schwartz Fall, 2006
    Psychology 36. Thinking, Judgment, and Decision Making Barry Schwartz Fall, 2006 In the modern world, people are faced with difficult decisions on an almost daily basis. From consumer purchases to college choices to romantic commitments to health care options to career paths, decisions must be made in the face of plentiful but incomplete information and uncertain outcomes. In this course, we will examine both how people should go about making decisions and how people do go about making decisions. We will see that there is often quite a substantial gap between what people should do and what people do do, and we will examine what, if anything, can be done to close that gap. The aim of the course is both to familiarize you with exciting contemporary research on judgment and decision making, and to give you tools that might help you to improve your own decision making. What makes the study of judgment and decision making so interesting and exciting to me is that it studies basic psychological processes in a way that is extremely closely connected to real life application—both to personal life and to public policy. By studying how people formulate goals, determine values, gather and evaluate evidence, think about uncertainty, make choices, think about the results of those choices, and revise their goals and values, we will simultaneously (I hope) make ourselves more conscious of our own decision making processes so that we can improve upon them. Requirements The course will include a midterm exam, a final exam, and a term paper (8 pages). The term paper assignment will be described in class.
    [Show full text]
  • Heuristics and Public Policy: Decision Making Under Bounded Rationality
    ISSN 1936-5349 (print) ISSN 1936-5357 (online) HARVARD JOHN M. OLIN CENTER FOR LAW, ECONOMICS, AND BUSINESS HEURISTICS AND PUBLIC POLICY: DECISION MAKING UNDER BOUNDED RATIONALITY Sanjit Dhami Ali al-Nowaihi Cass R. Sunstein Discussion Paper No. 963 06/2018 Harvard Law School Cambridge, MA 02138 This paper can be downloaded without charge from: The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center The Social Science Research Network Electronic Paper Collection: https://ssrn.com/abstract=3198739 Heuristics and Public Policy: Decision Making Under Bounded Rationality Sanjit Dhami Ali al-NowaihiyCass R. Sunsteinz 18 June 2018 Abstract How do human beings make decisions when, as the evidence indicates, the as- sumptions of the Bayesian rationality approach in economics do not hold? Do human beings optimize, or can they? Several decades of research have shown that people possess a toolkit of heuristics to make decisions under certainty, risk, subjective uncertainty, and true uncertainty (or Knightian uncertainty). We outline recent advances in knowledge about the use of heuristics and departures from Bayesian rationality, with particular emphasis on growing formalization of those departures, which add necessary precision. We also explore the relationship between bounded rationality and libertarian paternalism, or nudges, and show that some recent ob- jections, founded on psychological work on the usefulness of certain heuristics, are based on serious misunderstandings. Keywords: Heuristics; biases; Bayesian rationality; ecological rationality; true uncer- tainty; libertarian paternalism. Professor of Economics, University of Leicester, United Kingdom. yProfessor Emeritus of Economics, University of Leicester, United Kingdom. zRobert Walmsley University Professor, Harvard University, USA.
    [Show full text]