Heuristics: What are they?

This will be one of the first articles in an ongoing series on behavioural economics, and we will begin by looking at heuristics. These are mental ‘shortcuts’ that we use to make the decision-making process easier, but can sometimes cause us to make the wrong choice – here, we will explore how they are formed, the uses and the drawbacks.

Heuristics and biases like these are used to make quick decisions, and so they would come under Kahneman’s idea of the mind’s System 1[1]. According to Daniel Kahneman, a renowned social psychologist and a laureate of the Nobel Prize in Economics, the mind’s decision-making process is split between two systems. The first is System 1, also known as the Automatic System, which operates automatically and quickly, with little or no effort and no sense of voluntary control, and heuristics help System 1 in doing so. System 1 takes care of most decisions and does not require any conscious effort – it ranges from choosing how to get to work in the morning to picking up your phone when you’re bored.

However, this automatic decision-making process can lead to irrational choices, such as being scared of a shadow behind the door. The use of heuristics when making the wrong decision can lead to cognitive biases. System 2 is also known as the Reflective System, which takes time and effort but usually makes the rational decision more often. A decision made by System 2 could be where to go on holiday or what car to get, as these are crucial decisions that would be very costly if made incorrectly. Initially, it may seem justified to only use System 2 for every decision a person makes in the day as the risk of using System 1’s fast but reckless process could seem pointless to take on, but the same speed is also its most significant advantage. Humans have very limited time, and even of the time they do have, they do not want to waste it on which chocolate bar to buy or where to park the car, and so System 1 allows them to save this hassle and move on.

We only come to gain these heuristics through the use of System 2 when you make a particular type of decision for the first time. Any experiences in making that decision will create biases for the next time you make a similar choice and makes it easier to choose a similar result. This repeats until these biases become heuristics that allow for the decision to be automatic, even if it may not be the right decision. Heuristics can be very useful when estimating, such as the heuristic of anchoring which we will explain later, while other heuristics appear in research and debates in the form of confirmation bias and even in sports with the idea of the hot-hand fallacy. There are many other heuristics, but these are some of the most prominent and widely referenced in the field of behavioural economics. In the following articles, we will look at two of the most important and prominent heuristics – the heuristics of anchoring and availability.

[1] ‘Thinking, Fast and Slow’, Pages 20-21 – Daniel Kahneman, 2011

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