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These rules, or heuristics, are ingrained in us and work fine in most situations. However, there are times when it can lead to undesirable outcomes, and in psychology these errors are referred to as “cognitive biases”. Emotional biases, meanwhile, are the result of social influences and life experiences.
Have you ever made an educated guess? We all have, and that’s one example of how heuristics influence our decision-making process. By its very nature, behavioural finance suggests irrational behaviour is common, and almost expected, even though we would like to think of ourselves as logical beings.
It provided much of the basis for the research conducted by Daniel Kahneman and Amos Tversky (and one-time Collaborator and Psychology Professor, Paul Slovic) who established a cognitive basis for common human errors that arise from heuristics and biases.
The first step to overcoming your inherent biases and making better choices is to recognise them and then actively work to overcome them, or at the very least acknowledge them in the decision-making process.
As an interesting exercise, below are some “simple” quiz questions that could help highlight the biases you may not be aware of.
A bat and a ball together cost $1.10 in total. The bat costs a dollar more than the ball. How much does the ball cost?
$0.05 (Bat = $1.05 & Ball = $0.05) If the ball were $0.10, the bat would therefore have to be $1.10, to be $1 more than the cost of the ball, which would = $1.20 in total.
If it takes 5 minutes for 5 machines to make 5 widgets, how long would it take 100 machines to make 100 widgets?
5 minutes (it takes 1 machine 5 minutes to make 1 widget)
In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake?
47 days (if it’s half covered and then doubles that means it’s fully covered the next day)
Consider an imaginary young woman named Linda, who is single, outspoken and very bright, and who, as a student, was deeply concerned with issues of discrimination and social justice.
Which was more probable: (1) Linda is a bank teller; or (2) Linda is a bank teller and is active in the feminist movement.
(2) Linda is a bank teller and is active in the feminist movement.
(1). Both (1) and (2) state she is a bank teller, therefore the probability of each are the same. (2) Introduces a further detail, which has to lower the probability. Your brain used a quick and fallible heuristic rather than take a moment and understand what the question was really asking.
How many animals of each kind did Moses take in the ark?
None. Moses didn't take any animals in the ark, it was Noah (again your brain used a quick and fallible heuristic, seeing a biblical name in a question like this and accepted it).
Which of these monsters is bigger?
The one at the back
they're both the same size
they are both the same size (looking back at the image again, even though you know they are the same size; you physically still can’t see it with the context of the "3D" picture.