4.1.2.3 Biases in Decision Making - Using Rules of Thumb (AQA)

Rules of thumb, also known as heuristics, are mental shortcuts that people use to make decisions quickly and efficiently. For example, if someone is shopping for a new laptop, they might use a rule of thumb like "more expensive = better quality" to make a quick decision without doing hours of research. These heuristics can be helpful, but they can also lead to biases in decision making. In the example of the laptop, they might not realize that more expensive doesn't always mean better quality, and they could miss out on a great deal on a less expensive laptop.

In the field of behavioral economics, researchers have identified numerous biases that influence human decision-making. One common way people make decisions is by using mental shortcuts or rules of thumb, known as heuristics. While heuristics can be helpful for simplifying complex decisions, they can also lead to systematic biases and errors.

This study note explores some of the key biases that arise from using rules of thumb in decision-making, with real-world examples.

1. Availability Heuristic:

• Definition: The availability heuristic is a mental shortcut where individuals judge the likelihood of an event based on the ease with which relevant examples come to mind.
• Example: After hearing news reports of a plane crash, people may overestimate the risk of air travel and choose to drive long distances instead, even though driving is statistically riskier.

2. Representativeness Heuristic:

• Definition: The representativeness heuristic involves making judgments about the likelihood of an event based on how similar it appears to a prototype.
• Example: Investors might assume that a tech startup founder who fits the stereotypical image of a young entrepreneur in a hoodie is more likely to succeed, despite lacking relevant information about the business's fundamentals.

3. Anchoring and Adjustment Bias:

• Definition: Anchoring and adjustment bias occurs when individuals rely heavily on an initial piece of information (the anchor) when making decisions, even if that information is irrelevant or misleading.
• Example: When negotiating a salary, the initial offer made by the employer (the anchor) can significantly influence the final agreed-upon salary, often to the employer's advantage.

4. Confirmation Bias:

• Definition: Confirmation bias refers to the tendency to search for, interpret, and remember information that confirms pre-existing beliefs while ignoring or discounting contradictory information.
• Example: A climate change skeptic may selectively seek out and trust sources that support their views, reinforcing their existing beliefs, while dismissing opposing scientific evidence.

5. Overconfidence Bias:

• Definition: Overconfidence bias occurs when individuals overestimate their own abilities, knowledge, or the accuracy of their beliefs and predictions.
• Example: A trader might believe they can consistently outperform the stock market, leading them to take excessive risks and suffer financial losses.

Conclusion: Understanding biases that arise from using rules of thumb is crucial for making more informed and rational decisions. These biases demonstrate how heuristics, while efficient, can lead to systematic errors in judgment.

A-level students should be aware of these biases and learn to critically evaluate their decision-making processes to avoid falling into common cognitive traps in real-world scenarios.