Biases & Heuristics Flashcards
1
Q
What are heuristics?
A
- These cognitive shortcuts used to produce reliable outcomes sufficiently to be useful.
- Are approaches that “work well enough” for a given situation. Cuts down on the amount of information needed to make a decision.
- Heuristics can be mental shortcuts that ease the cognitive load of making a decision. Examples that employ heuristics include trial and error, a rule of thumb, or an educated guess
2
Q
What is confirmation bias?
A
- the tendency to seek out information that confirms rather than challenges what we already believe.
3
Q
What is the primacy-recency bias?
A
The first and last pieces of information are the most salient for you
No ANCHOR POINT for information in the middle
4
Q
Name 3 General Biases and Heuristics that clients experience?
A
- First/Last
- Emotion
- Frequency
5
Q
Name 3 Planner Tendencies
A
- Client Acceptance
- Planner Confidence
- Quantitative/Qualitative
6
Q
Belief Perseverance Biases
What is Conservatism Bias?
A
- Conservatism bias: the tendency to revise one’s belief insufficiently when presented with new evidence
7
Q
Belief Perseverance Biases
What is Confirmation bias?
A
- Confirmation bias: the tendency to focus on and interpret information in a way that confirms one preconception.
8
Q
Belief Perseverance Biases
What is Cognitive dissonance?
A
- Cognitive dissonance: the tendency to experience mental stress or discomfort when holding two or more contradictory ideas, beliefs, or values at the same time,
- or when performing an action contradictory to one’s ideas, beliefs, or values, or when confronted by new information that contradicts existing ideas, beliefs or values
9
Q
Belief Perseverance Biases
What is hindsight bias?
A
- Hindsight bias: the belief that past events were predictable at the time they occurred
10
Q
Belief Perseverance Biases
What is the illusion of control bias?
A
- The illusion of control: the overestimation of one’s control over external events
11
Q
Belief Perseverance Biases
What is Representativeness bias?
A
- The tendency to classify things based on a few characteristics without accounting for the base rates of those characteristics
12
Q
Information Processing Biases
What is the Anchoring and Adjustment bias?
A
- the tendency to rely heavily on one piece of information when making a decision
13
Q
Information Processing Biases
What is the Availability / familiarity / frequency / saliency / recency bias?
A
- the tendency to overestimate the likelihood of events that are more easily recalled given the recency with which they occurred or the emotional charge they hold
14
Q
Information Processing Biases
What is Framing bias?
A
- the tendency to draw different conclusions from different presentations of the same information
15
Q
Information Processing Biases
What is self-attribution bias?
A
- the tendency to claim more responsibility for successes than failures
16
Q
Information Processing Biases
What is sunk-cost bias?
A
- the decision to invest or spend money, time, effort, etc. despite new evidence that shows that the expected cost of doing so exceeds the expected benefits
17
Q
Information Processing Biases
What is Outcome bias?
A
- the tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made
- The outcome bias is an error made in evaluating the quality of a decision when the outcome of that decision is already known
18
Q
Emotional Biases
What is affinity bias?
A
- the tendency to be drawn to those people, things or decisions that one views as being similar to themselves
19
Q
Emotional Biases
What is Disposition bias?
A
- the tendency to sell an asset that has accumulated in value and resist selling an asset that has declined in value
20
Q
Emotional Biases
What is Endowment bias?
A
- the tendency to overvalue an object because they possess it
21
Q
Emotional Biases
What is loss aversion bias?
A
- the tendency to view losses as more painful than similar amounts of gains
22
Q
Emotional Biases
What is overconfidence bias?
A
- the tendency to be overly sure of oneself and their ideas
23
Q
Emotional Biases
What is regret aversion bias?
A
- the tendency to avoid making decisions for fear of experiencing regret
24
Q
Emotional Biases
What is self-control bias?
A
- the tendency to choose those actions that provide gratification in the short-term over the long-term
25
_Emotional Biases_
What is the Status quo bias?
* the tendency to choose to maintain the current situation rather than change
26
Name 7 Types of Heuristics
1. Anchoring
2. Availability
3. Confirmation
4. Denial
5. Herd Behavior
6. Hindsight
7. Overreaction
27
Define the Heuristic of Anchoring
Anchoring: **Using irrelevant figures and statistics as a reference point to base future decisions on.** There is no substitute for critical thinking.
* relying heavily on one piece of information
28
Define the Heuristic of **Availability**
Availability: Using available information based on its **vividness and emotional impact to base decisions on.**
* A barrage of information out there, so people lack expertise in examining and reaching viable conclusions.
* makes people think they are more informed than they are.
* Imagine an outcome and you are more likely to believe it may come true
* **tendency to overestimate the likelihood of events that are more easily recalled given the recency with which they occurred or the emotional charge they hold.**
29
Define the Heuristic of **Confirmation**
Confirmation: **Look for information that supports your position and avoid info that contradicts it.**
* Critical scrutiny may be applied to prove your position yet the other side may be ignored.
* **rely on information that will support your own preconceptions**
30
Define the Heuristic of **Denial**
Denial: **Avoiding information with negative emotional impact**.
* Don't ask them to imagine the negative outcome as they may think it is even less likely to occur.
31
Define the Heuristic of **Herd Behavior**
Herd Behavior: **People with very little experience fall prey to this behavior. Following a large group whether rational or irrational.**
32
Define the Heuristic of **Hindsight**
Hindsight: **Makes rational decision-making more effective**.
* Adds to the base knowledge already known from facts and investigation.
* Adding onto already known info…feedback or results of current behavior may reinforce the status quo etc.
* May lead to OVER Confidence…results reinforcing in some way they are better stock pickers than they are
* **The belief that past events were predictable at the time they occured.**
33
Define the Heuristic of **Overreaction**
Overreaction: **to possibly financial news item that has more significance than is warranted.**
* They may overreact and make financial decisions they may regret.
34
What is Prospect Theory and name the 3 types?
1. Joy/Pain function
2. Disposition Effect
3. Hedonic Framing
35
What is the **Joy/Pain function** of prospect theory?
* People **feel pain much more significantly than they do feel joy.**
* The **joy of gains feels less** enjoyable than the pain of losses.
* **Better** to feel **one large loss** rather than several small losses,
* Better to have a gain and a loss rather than a net loss.
* May seek to avoid possible losses.
* More willing to **settle for small gains** if there is a reasonable chance of gaining more
36
What is the **Disposition Effect** of prospect theory?
* **Hold too long** to losses and sell to soon on gains.
* Prefers a small gain over a large gain or no gain.
* **Risk-averse behavior**. On the flip side, a person may take on more risks to avoid small losses.
* In their mind, it is **better to avoid the small loss rather than take a large loss or no loss.**
* This is not risk adverse behavior.
37
What is **Hedonic Framing** of prospect theory?
* **Pleasure seeking**.
* **Maximize joy and minimize pain**.
* This can minimize the disposition effect. **Several small gains can enhance or maximize joy.**
* Better here to have a smaller net gain than to have a larger gain and a small loss.
* Take a large loss and small gain rather than a net loss.
38
What is the **Winner's Curse** and the **difference between the common value auction and the intrinsic value auction**?
1. _The winners curse_: The **winner pays a price that is greater than the intrinsic value** to the winner and is also **greater than the FMV of the item in a broader open market**. Number of bidders and their aggressive attitude toward the bidding
2. _Common Value auction_: **winner overpays** as they all know roughly the intrinsic value of the item
3. I_ntrinsic value auction_: the **winner may overpay** because the intrinsic value was much greater to him. An example may be the war medals of his grandfather. **Sentimental value. May pay more to have them.**
39
What is the **Gamblers Fallacy** and how do you avoid it?
* is the belief that **independent events reoccurring are in fact somehow connected** and **with each subsequent event your odds to win may somehow be better**.
* Simply avoid analyzing the results of previous events and avoid gambling.
* Flip a coin and think because you won a few times your odds may be better than they actually are.
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