What are heuristics? Heuristics are simple rules your brain uses to make decisions. Heuristics are basically part of intuitive decision making processes. They are used to simplify and approximate decision making process in order to allow individuals to make decisions with limited resources. Due to their nature heuristics can be helpful in making some of decisions, but they often tend to lead individuals to wrong choices by approximating and ignoring some parts of critical data for making decisions.
For example, you are going on holiday to France. Before leaving, your friend has told you that average price of wine in France is 20 € per bottle. During holiday you go into shop and see wine with price of 10 € and you decide not to buy it. Its price is lower than average, so its quality must be lower than average. Did you made correct decision?
No! Or, actually, you don’t know! You made your decision by guessing. Due to limited information available for decision making process your brain made decision by using anchoring heuristic. You knew average prices and that was only information you possessed about wines in France. Due to limited information on wines, your brain used only available information it had (average price) and it generated anchor value. All your decisions are concentrated around anchor value. Consequently you decided that 10 € wine does not have good quality and you didn’t buy it. Do you really think that price and quality are always in correlation? Maybe wine producer is selling high quality wines for lower prices in order to penetrate market more effectively. Maybe your anchor was wrong, and average quality wines in France cost less than 20 €. You can’t know that, but you made the decision nevertheless. This decision may be correct, but it can also be wrong.
Now let’s talk about more important decisions in your life and influence of heuristics on them. Let’s see this example: you need to invest your savings and you don’t know where. You know that IT is business of future.You’ve heard of success stories of Apple, Google, Facebook and other IT companies. You know that, often, small IT companies are sold for large amounts thus increasing the shareholders’ profits. So you’re making your decision – I’m going to invest in technology companies which are very perspective. Did you made correct decision?
No! Or, once again, you don’t know! Although technology companies tend to have large growth, over 60% of these companies go into bankruptcy proceedings in first 3 years of their business. This time your brain fooled you by using representativeness heuristic. You thought that, because of more notable success of some companies, most companies in this field are successful, so you once again made your decision by guessing. Representative example of some companies success made you believe that all companies are successful, which, unfortunately, is not true.
In the past behavioral scientists identified and classified a large number of heuristics which diminish effectiveness of decision making processes, causing individuals to make erroneous decisions or, let’s say it simple: to make wrong choices!
In order to neutralize negative effects of heuristics, behavioral scientists started developing technics with which people can make better choices instead of being mislead by heuristics. Based on that technics we developed our decision making tools which can aid you in making more effective and better life decisions. All tools are available on our Tools webpage.