Heuristics & Biases Flashcards
Herbert SimonNobel Prize -> Principle of bounded rationality
When individuals make economic choices their rationality is limited by:
Available info
Cognitive limitations of their mind
The time available
The perceived risk associated with decision
The emotional involvement
Instincts
Innate and Unalterable patterns of activity or tendencies associated with Biology
Habits
Automatic and rigid patterns of behaviour (learned through effort and repetition)
Cognitive Illusions
Situations where your mind systematically and non-consciously misperceives or misinterprets the info available
Cannot Turn them off - even when we know they exist
Dunning-kruger (Illusion of superiority where people incorrectly perceive themselves as top performers even if they have objectively lower competence than average
Biases
Systematic (non-random) and non-conscious patterns of deviation from norm, logic or rationality in judgement.
Fluency bias
Ambiguity bias
Heuristics
Cognitive shortcuts (rules of thumb that simplify decisions Example high price is perceived as quality
Paradox of choice
Jam experiment
Illusion of superiority
Dunning-kruger (Illusion of superiority where people incorrectly perceive themselves as top performers even if they have objectively lower competence than average
Fluency Bias
Fluent statements that are easier to process are better remembered (More true, more likable)
Ambiguity Bias
People tend to avoid ambiguity and uncertainty (prefer known)
Affect Heuristic
Automatic Mental shortcut that helps you make quick judgments (non-consciously substituting a difficult decision with an easier one)
Humans are EMOTIONAL but explain RATIONALLY (90%of decisions are emotional)
YES
Status Quo Bias
We have a tendency to avoid change and maintain current state of affairs (more when low energy or motivation)
Prospect Theory:
Kahneman and Tversky - people make economic choices on subjective value - the utility that each person assigns to the object or outcome
People make economic choices based on subjective value not expected value and use certain heuristics that deviate from rationality
Reference points matter
3 Principles of Prospect Theory
- Loss Aversion
- Reference Dependence
- Diminishing Sensitivity
Sunk Cost Fallacy
When we continue something as a result of previously invested resources (time, money or effort)
Endowment Effect
People attribute more value to the things they OWN (Ownership increases value)
Possibility & Certainty Effect
Changes in probability do not affect peoples subjective evaluations
a. Possibility effect - when highly unlikely outcomes are weighted disproportionately more than they deserve
b. Certainty: When sure outcomes are weighted disproportionatly more than they deserve
Non Consistent Risk Preferences
We are risk averse in gains and risk seeking in losses - willing to pay a PREMIUM to remove risk
Reference Dependence (Framing)
We are influence by the context in which things are presented to us
Anchoring
Human tendancy to rely too heavily on a previous piece of information when evaluating an uknnown value. Once the anchor is set it’s hard to change
Contrast Principle
the way we see the difference between two things that are presented together or one after the other, if the second item is fairly different, we perceive it as MORE different
Mental Accounting
Money is FUNGIBLE (interchangeable) but we tend to divide our assets (current and future) into separate and non-transferable mental accounts. Mentally compartmentalize complex decisions making
Diminishing sensitivity
As numbers scale UPWARD we become less sensitive to the impact variations can produce
Bernouilli’s Proposal -> Subjective Value
the utility that each person assigns to the object or outcome (based on its usefulness)
Changing Habits:
Trigger (Keep, eliminate)
Routine (Insert New one)
Reward (Keep)
For easy habit change, keep the trigger and reward but insert new routine and insert friction
Creating Habits (3 Stages)
Trigger (Cue or reminder)
Routine (physical, mental, emotional behaviour
Reward
Habit Research:
Large scale studies where respondents are asked to keep written records of the details of product usage or their shopping habits for an extended period of time
In context research - people are interviewed or observed while performing the task or using product
Narrative Fallacy
Limited ability to look at sequences of facts without weaving an explanation into them (Search Party)
Stories are 22x more memorable than facts or figures alone
Illusion of Control
Tendency to overestimate our ability to control events and believe we have more influence than we do. (Superstition)
Clustering Illusion
tendency to erroneously believe that streaks or clusters that are random represent a pattern.
**iPod shuffle example
Conditional Probability
The likelihood of an event or outcome occuring based on the occurrence of a previous event or outcome
Bayes Theoroem
(P(A/B) = P(B/A)P(A)/P(B) - calculating the actual probability of something
Regression to the mean
The statistical phenomenon that established that things even out over time (Unusually high or low tend to be followed by measurements close to the mean)§
Availability Heuristic
The process of judging frequency or probability by the ease that something comes to mind
You will remember: Salien events, recent events, dramatic events, personal experience, vivid examples
Representative Heuristic
Judging the likelihood that someone or something belongs to a certain category by looking at how closely it resembles the typical or average member of the category (Stereotypes)
Packaging of packages
Conjunction Fallacy
Faulty reasoning inferring that a conjunction is more probably or likely, than just one of its elements
Multiple specific conditions are more probably than one (Linda feminist and banker or just banker)
Disjunction Fallacy
When we estimate a disjunctive statement to be less probably than at leas one of it’s component statements
WYSIATI
What you see is all there is
Salience Bias
-More likely to focus on items or info that are more prominent and easier to process, ignoring less so
90% risk of success in surgery vs 10% risk of complications
Survivorship Bias
Logical error of concentrating on the people or things that made it past some selection process “Survivors” and overlooking those that did not (lack of visibility)
Halo Effect
Tendency to generate a general impression of something based on our opinion of that thing or person in other areas (You like an athlete, so you buy their product)
Outcome Bias
Tendency to judge a past decision by it’s ultimate outcome instead of based on the quality of the decision at the time it was made given what was known at the time
Example - Youre a marketing manager and have to decide to launch 1/2 products, you pick the product most likely to succeed but it fails. The other company who chose the other product does really well. You will feel differently about your choice during the decision and after once you have the results
Hindsight Bias
After an event happens, the inclination to think the event was predictable, despite there being no evidence for that idea.
Memory Distortion - imperfect ability of our minds to reconstruct past states of knowledge
Confirmation Bias
Tendency to search for, interpret favor and recall information in a way that confirms ones’ pre-existing beliefs or hypothesis while avoiding the information that contradicts them.
How to reduce? Check that you are examing ALL EVIDENCE, consider the opposite opinion, find a devils advocate argument and use prospective hindsight
Classical Conditioning
Reflexive or automatic type of learning in which a stimulus acquires the capacity to evoke a response that was originally created by another stimulus (PAVLOV)
Marketing Applications (Champions league + Heineken, Music +Coca Cola, we develop a physical response to certain stimulus)
Operant Conditioning
A learning process through which the strength of a voluntary behavior is modified by reward or punishment –> Consequences drive behavior (Apple watch)
6 Principles of Influence:
- Commitment and Consistency
- Reciprocation
- Social Proof
- Liking
- Authority
- Scarcity
Cognitive Dissonance
mental discomfort experienced by a person who holds two or more contradictory ideas/values or whose actions don’t match their beliefs.
Mere Exposure effect
(Familiarity breeds likability) the more we are exposed to something, the more familiar it feels, the more we like it.
Brain Changes due to technology
- Digital Amnesia “Google Effect”
The Internet has become the external hard drive for our memories and it’s changing how we perceive and remember the world around us.
Losing our sense of direction (Google Maps) - Impaired Ability to Focus
Experiencing self wants FUN while reality self needs to do something
Info OVERLOAD
Continuous Distractions - Multitasking - Changing tasks makes it virtually impossible to focus, this affects our cognitive and thinking abilities
- > Continuous partial attention
- > 64” to recover your train of thought after an email interruption
Multitasking:
Continuous Partial Attention
Shortened Attention Spans
Stimulation Addiction
2.Innovation Optimism-
people are optimistis about innovation
More innovators and early adopters than ever before
What are the 5 factors for Consumer Empowerment?
- Price
- Ratings and Reviews
- Recommendation from Friends and family
- Brand
- Free Shipping
Pain of Paying
Pain is INCREASED by two factors
Saliency of payment (More pain when money is leaving our hands, physical and obvious)
TIMING of the payment(we feel more pain if we pay after we consume)
Reduce the Pain of paying Fixed Fee or flat rate Decoupling Prepayment Splitting the payment Simplify Payment Token Payment System
Experiencing self and remembering self
(we aim to satisfy remembering self and might not be as accurate as we think
Affect heuristic:
an automatic mental shortcut that helps you to make quick judgements by bringing your emotional response into play.
