Heuristic And Bias Of Decision Making

Most of us have to make decisions from the time we wake up until the time we go to bed at night. Answering questions like what should I eat for breakfast, can I make that yellow light and should I go to the gym or go out for pizza all require us to make a choice or a decision (Robbins, S.P., Judge, T.A., 2009). At work I am challenged with collaborating with managers and other leaders to make decisions based on scenarios and events that occur in the hospital.

However, three of the most prominent in this area are the anchoring heuristic, the representativeness heuristic, and the availability heuristic. Each of these biases provide a way for people to make judgments very quickly. Although they often work, they can also be a source for error because people, in making quick judgments, tend to make generalizations about others that are sometimes accurate, but not always. In considering decision making skills, research has demonstrated that people tend to think more highly of themselves, both morally and in their capabilities, than others. This inflated self view can cause people to greatly overestimate their own capabilities while grossly underestimating the capabilities of others. People's overconfidence can lead them to make inaccurate decisions and to choose the wrong course of action: they tend to give more attention and weight to their own insights rather than to objective information.

Kahneman’s article is an analysis of intuitive thinking and how it guides our decision-making. Although primarily aimed at the field of psychology, it is an interdisciplinary article with applications in economic theorising. Kahneman attempts to differentiate between two systems of thought, one of intuition (system 1) and one of reasoning (system 2), and argues that many judgements and choices are made intuitively, rather than with reason (a slower and more deliberate process). Intuitive decision making, which encompasses heuristics, although generally more efficient and rapid, makes the agent potentially subject to errors due to framing effects or violations of dominance. The analysis of the studies and theoretical situations also provides criticism of the commonly held model of the rational agent within economics. The article also further conceptualises Kahneman’s theory, the Prospect Theory (Kahneman & Tversky, 1979), which has descriptive applications of people’s choice in decision-making situations involving risk and known probability of outcomes. These situations are typically unexplained by the more normative rational agent model.

Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or ‘hunch.’

When humans make a decision, it often turns out to be “predictably irrational” (Ariely, 2009). They always deviate systematically from expected decision rather show an inclination towards a certain way of thinking. This consistency of behavioral or decision bias can be very helpful to identify consequences or outcomes in a different

The stock market is a risky business. Investing can make you wealthy beyond your wildest dreams, in which only a few investors have found the formula. Otherwise making the wrong decision

Almost everyone uses decision-making on a daily basis. The ability to make decisions is significant because possible outcomes can outweigh losses depending on the decision you choose to make. Decision-making helps to solve everyday problems, but has also been beneficial to solving several scientific issues like Bechera, Damasio, Damasio, and Anderson (1994) did in their study of the Iowa Gambling Task. There were a total of 50 participants in their study, where 44 men and women were from a normal control group and 6 men and women were E.V.R subjects. The subjects are told to select a card from four decks until they are told to stop. The subjects receive money depending on the deck they choose from. After so many turns and receiving money, they

Moisand, D. (2000). Effective Financial Planning in the Presence of Judgmental Heuristics. Journal Of Financial Planning, 13(4),

Having a strategy going into the stock market is one of the most important things that you can do when in the stock market. As a group, one of the first things we did was set up a strategy we were going to use. We found that the best way for us to succeed in this project was to look at weekly tips from professional investors and hand select the few stocks we thought were going to do well in the coming weeks. We would then

Challenges are presented to people on the daily basis. What to eat, drink, where they have to go, who they need to see, and etc... These things all impact the decision making process and the decisions made. In financial decision making, highly successful people do not make investment decisions based on past sunk outcomes, rather by examining choices with no regard for past experiences; this approach conflicts with what one may expect. In addition to past experiences, there are several cognitive biases that influence decision making.

Prospect theory is an important alternative descriptive theory for decision-making under unreliable situation (Kahneman and Tversky 1979), which includes real life selection and psychological analysis between choices that involve risk. Prospect theory, which efforts to explain individual make decisions between risky replacements based on the value of potential gains and losses (Wakker 2010), advanced from expected utility theory, which explains that investors want to maximize expected utility of wealth when unclearly situations (Blavatskyy 2007). According to Kahneman and Tversky (1992), more recent researches perceived nonlinear preferences in choices that do not involve definite events in prospective theory. The concept of framing effect refers description invariances (Kahneman and Tversky 1992). To be specific, individual always makes the same decision in identical choice conditions. Also, decision makers have tendency to

This distinctive book called, “Thinking, Fast and Slow” by Daniel Kahneman, is one of very few exquisite readings I’ve completed so far. Daniel Kahneman is a psychologist in Princeton University, and due to his research, he won a Nobel Prize in 2002 in economics. In the beginning of his book, he speaks of our cognitive System 1 and System 2 ways of thinking. System 1 generates feelings, impressions, and memory. It is very instinctive, automatic, and is considered quick thinking. System 2 on the other hand, is alert during complex problem solving, while dealing with facts and knowledge, and is attentive while working with difficult calculations. For example, a problem such as 24 x 13, this takes more time and knowledge to figure out (System 2), rather then recognizing an emotion from face expressions (System 1). When System 1 is strained, your System 2 steps in to help you process through that specific instant. Now aside from the psychological portion of this book, Mr. Kahneman divulges about a consolidated economic analysis with elemental intuitions from the psychological perspective; such as, luck and skill, overconfidence, risks in the stock market, factors of success and the decision making process. This book is overall concluded with the understanding of behavioral economics, which is the social and cognitive components on economic decisions that are defined by individuals and have consequences that reflect from making those decisions and taking those risks.

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

The importance of decision making in individual daily life and in organization level was demonstrated by two scientists, Arkes and Hammond (1992), in ‘Judgment and Decision making’ indentified the four types of information which decision maker requires constructing a decision tree.

My independent research in the field started with my curious interest in the processes of how decisions made by individuals and governments, what are the main factors encouraged them to choose particular decision over other options and the outcomes of those decisions. Then, I started to read theories of great Economists, such as, Keynes, Freidman , Devenport, Kinnerly and Mason who wrote on decision-making and the ability of individual to interpret the information. Additionally, there were theories by De Bondt , Clark , Tversky and Kehnman who argued that human psychology is interconnected with economics which cannot be ignored. Learning those theories and comparing them with the real life happenings, my enthusiasm to get deeper insights of economics increased. Encouraged by this, I have compiled