Heuristics Flashcards
What are the four types of Heuristics? Give each one an example.
Common Sense: Looking both ways before crossing the street.
Intuitive Judgments: Choosing a book by its cover.
Rules of Thumb: Two cups of water for one of rice.
Best Practices: Following the generally accepted accounting principles.
What is the anchoring effect?
is the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions and there is a bias toward interpreting other information around the anchor.
What are biases?
They represent a tendency to lean in favor of or against a person, group, idea, or thing, usually in a way that is unfair.
What are three different types of cognitive biases and what to they mean?
Availability Bias - The ease with which we can think of examples is often used to judge the frequency of events.
Optimism Bias - We try to simplify our lives by creating a world that is much tidier than reality; in the real world, we often face painful tradeoffs between benefits and costs.
Confirmation Bias - To make their theories work, people “smooth out” the “jumps” in a time series or historical sequence, looking for and finding patterns that are not there.
What is the decoy effect? Give on example.
It describes describes how, when we are choosing between two alternatives, the addition of a third, less attractive option (the decoy) can influence our perception of the original two choices. (ie. Starbucks Cups)
What is the Paradox of Choice?
Having too many options makes decisions harder.
What is the Prospect Theory?
It suggests that individuals evaluate potential losses and gains relative to a reference point, with a greater sensitivity to losses than to equivalent gains.
What are three key assumptions of the Prospect Theory?
Loss Aversion: People fear loss more than they desire gain.
Loss Priority: People prioritize avoiding losses based on their situation, experiences, culture, and preferences.
Probability Misjudgment: People often overestimate low-probability events and underestimate high-probability events.
What are cognitive biases?
They are a systematic error in thinking that affects the decisions and judgments that people make
