Heuristics + Biases

= Risk of Bad Decisions

Business Decision Analytics

Week 3a
Biases & Heuristics
Dr Heinz Herrmann
Introduction To Heuristics
 Heuristics
• Remember synapses from Week 2: System 1 in the brain performs
intensity matching, enabling us to make judgments about current
events based on past experiences or what we learnt from others
• Mental shotgunning: We can’t stop System 1 from evaluating
information it knows how to
• Associative mapping: if we can’t answer a hard question quickly, our
brain automatically substitutes an easier related question in and
answers that
• This produces mental shortcuts for making quick intuitive decisions
(mental “rules of thumb”)
• Often oversimplified evaluations of situations lead us to make
suboptimal decisions
• Heuristics mostly save us from making very risky or catastrophic
decisions
 Types of Heuristics
• Availability Heuristic: tendency to overestimate the likelihood of
events based on how recent the memories are or how unusual or
emotionally charged they may be
• Affect Heuristic: the reliance on a “good” or “bad” feeling in making a
decision - basically, trusting your intuition to make quick judgment
calls
• Anchoring and Adjusting Heuristic: when estimating uncertain
quantities, people tend to start from a given number (the anchor) and
adjust either higher or lower. The adjustment typically ends
prematurely when we are no longer certain that we should adjust
farther - people often overpay as a result of anchoring
• Representative Heuristic: the degree to which A resembles B
influences the degree to which people believe A originates from B.
Prototype matching leads to a conjunction fallacy
Intuition is prone to Biases & Heuristics
Biases are the result of judgemental heuristics
• Biases and heuristics are often confused
• A bias is not a cognitive evaluation of a situation but rather a belief
or an influence based on preference and/ or desired perception
Check out these posters
for a comprehensive
listing of decision-
making traps:
https://storage.googleapis.com/titlemax-media/099372db-50-

cognitive-biases-2_80per.png

https://upload.wikimedia.org/wikipedia/commons/6/65/Cogni

tive_bias_codex_en.svg?ref=insanelyusefulwebsites
Biases & Judgement Errors
Biases also make it hard to make healthy decisions
 Anchoring
Status Quo
Biases & Sunk Cost
Heuristics Confirming Evidence
Are Traps of Framing
Decision Overconfidence
Making Prudence
Recallability
What we see or Anchoring
hear first feels
most important. Status Quo
Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
WHAT TO DO ABOUT IT • Take a different
The Anchoring perspective.
Trap • Think before asking.
• Seek input.
• Avoid anchoring
others.
We prefer things Anchoring
to stay the same.
Status Quo
Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
WHAT TO DO ABOUT IT • Consider your
The Status-Quo objectives
Trap • Know you have
options
• Don’t exaggerate
switching costs
• Don’t settle
We make Anchoring
decisions that Status Quo
justify past
choices. Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
THE SUNK COST TRAP

Don’t cling to flawed

decisions.

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WHAT TO DO ABOUT IT • Involve outsiders
The Sunk-Cost • Accept that mistakes
Trap happen
• Allow room for
failure
As Warren Buffett Put It…

“When you find yourself in

a hole, the best thing you
can do is stop digging.”
We seek Anchoring
information that
supports our Status Quo
existing point Sunk Cost
of view.
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
WHAT TO DO ABOUT IT • Consider all
The Confirming evidence
Evidence Trap • Find a devil’s
advocate
• Avoid yes-men
The way we Anchoring
state the problem
influences what Status Quo
we decide. Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability

21
THE FRAMING TRAP

vs.

GAIN LOSS

22
WHAT TO DO ABOUT IT • Always reframe
The Framing • Think in neutral
Trap terms
• Challenge others’
frames

23
We tend to Anchoring
trust our own
estimates Status Quo
too much. Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
WHAT TO DO ABOUT IT • Look at the
The extremes
Overconfidence • Challenge those
Trap extremes
• Question one
another’s estimates
We adjust Anchoring
estimates to
be “on the Status Quo
safe side.” Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
THE PRUDENCE TRAP

Padding Estimates
Doesn’t Pay Off
WHAT TO DO ABOUT IT • Aim for accuracy
The Prudence • Ask others to do
Trap the same

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We are overly Anchoring
influenced by our
past experiences. Status Quo
Sunk Cost
Confirming Evidence
Framing
Overconfidence
Prudence
Recallability
WHAT TO DO ABOUT IT • Examine
The assumptions
Recallability • Check the facts
Trap

30
Trap
+
Trap
=
Worse Decisions
Awareness Is Your
Best Weapon
Prepare for your next big meeting (or your group assessment 2) by writing down the important
decisions that need to be made during the meeting. Then describe the top options for the decision.
Write down the objective criteria that should be used to make the decision. Think through and
document the potential biases and the timing of the decision.

Exercise