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Biases and Heuristics

• Examines how individuals actually behave, considering emotions, limitations, and heuristics, which aligns with System 1 reasoning
• Rational approach to making decisions, focusing on identifying probabilities, defining criteria, weighing factors, and generating alternatives
• Makes optimal decisions
• Relies on complete information and operates under System 2

Global Rationality

• Involves complete information, well-organized preferences, and excellent computational skills
• Maximizes outcomes
• Requires significant time and effort
• System 2 reasoning

Bounded Rationality

• Acknowledges limited information access, uncertainty, changing preferences, and varying motivation
• Satisfices by choosing what is "good enough"
• Spends less time and effort
• May miss out on optimal solutions
• Uses heuristics to minimize time and effort
• Makes quicker judgments under uncertainty
• Achieves simplification by examining fewer cues, reducing retrieval and storage difficulty, simplifying weighting, integrating less information, and examining fewer alternatives
• System 1 processing can override heuristics
• Can lead to bias, creating systematic judgmental errors

Availability Heuristic

• Estimates the probability of events based on recalling examples
• Ease of recall
  • Vivid, recent, or emotional events overestimate probability
    • Unique or rare events tend to be overemphasized despite being less frequent
• Ease of retrieval of information from memory based on memory structure
  • Influences how easily certain things come to mind based on context
• Overestimating the commonality of easily recalled events can lead to incorrect probability evaluations.

Representativeness Heuristic

• Judges the probability of an event by comparing it to an existing mental prototype, assuming similar outcomes
• Neglects base rates and other relevant information

How Similar an Example Is To Members of its Class

• How similar a sequence is to what is perceived as random
  • Predictions are often based on similarity rather than base rates

Confirmation Heuristic

• Searches for, interprets, and remembers information confirming preconceptions
• The confirmation trap involves seeking information aligning with existing beliefs, while ignoring contradictory evidence

Anchoring Bias

• Over-reliance on an initial piece of information
  • People tend to develop estimates based on an initial anchor derived from provided information
• Occurs even when anchors are presented subliminally
  • Mere exposure to high prices can increase willingness to pay

Conjunctive And Disjunctive Events

• Overestimates the likelihood of high-probability events occurring consecutively
• Underestimates the probability of a low-probability event occurring once over many attempts

Hindsight

• Believes past events were more predictable than they were
• Knowledge of an event's outcome works as an anchor

Curse of Knowledge

• Assesses others' knowledge and cannot ignore own awareness of information others do not have
• Diversity is a remedy
  • Involves adopting a mindset of perceiving differences, asking questions, seeking feedback, and using visuals

Overconfidence Bias

• Overestimates own knowledge, abilities, or prediction accuracy, leading to poor decision-making and excessive risk-taking
• Visual map categorizing over 180 known heuristics and cognitive biases
  • Provides a frame of reference for understanding cognitive biases
• Too much information leads to filtering and selection
• Limited meaning leads to filling gaps with assumptions and patterns
• Time constraints lead to simplification and using shortcuts
• Trade-offs are made around what is remembered and forgotten

Overconfidence

• Overestimation results in individuals overestimating their knowledge, abilities, or projection accuracy
• Can lead to poor decision-making and excessive risk-taking
• Three forms/manifestations of overconfidence:
  • overprecision

Overprecision

• Excessive certainty about knowing the truth or accuracy of beliefs
• Overprecision manifests as excessive certainty in accuracy, a lack of interest in testing assumptions, dismissing contradictory evidence, and overly narrow confidence intervals Causes:
• Lack of knowledge and rewards for overprecision, where being viewed as confident enhances perceived competence Consequences:
• Ignoring feedback, underestimating risks, inaccurate predictions, reduced collaboration, and inefficient allocation of resources

Overestimation

• Involves overestimating one's actual abilities or performance Manifestations:
• Entreprenuers and managers often overestimate the success of their ventures or the time it will take them to complte certain tasks Consequences:
• inflated sense of one's capabilities or likeihood of positive outcomes, leading to unrealistic expectations Self-enhancement:
• seeing onself positively can be evolutionarily motive (good for mental health to believe in yourself) Optimistic biases:
• The tendency to overestimate the rosiness of our future

Defensive Pessimism

• bracing for disapointment by making pessimistic assessmenets about capabilities Loss aversion: more painful to lose than gratifing to win Moment of Truth Effect: Start with hope and reduce expectations.
• The planning fallacy: overestimate completion

Overplacement

• A belief in being better than others in competitive contexts Manifestation:
• Most think they're better than average
• Most can't succeed in hard tasks or rare events
• Fail base rate (what's truly the odds- not own odds) Consequences:
• Excessive competition
• Poor cooperation
• Inflated expectations of success Business contexts:
• Excessive legal costs