Definition: Judgements and decisions are guided directly by emotions - the feeling of liking or disliking - with little reasoning.
Reference: Paul Slovic proposed the affect heuristic - people let their likes and dislikes determine their beliefs about the world and choices within in.
Example: Political preference largely determines the arguments that people find compelling.
Example: Liking a project means you are more likely to believe that the costs are low and the benefits are high.
Insight: The affect heuristic is an example of substitution - where the answer to an easier question (How do I feel about it?) serves as an answer to a harder question (What do I think about it?).
Insight: The affect heuristic creates a simplified version the world for us to make decisions within, rather than a reality based one.
Insight: Reliance on the affect heuristic to influence is common in politically based arguments where we can base our beliefs on our like or dislike of a person or party.
Definition: People consider prior information to value a quantity before estimating it.
Example: The listing price of houses for sale anchors peoples expectations.
Insight: Anchoring can be measured by comparing the ratio of the differences in responses to different anchors, to the differences in the anchors (anchoring index).
Insight: Anchoring effects can come from adjusting estimates relative to the anchor, or as the anchor having a priming effect.
Insight: Anchoring strongly influences decisions about money.
Definition: The ease with which instances come to mind.
Insight: The availability heuristic helps explain why some public issues remain high on the public agenda, while others are neglected. People tend to weigh the relative importance of a subject by how easily it can be retrieved from memory, with the media playing a large role in this.
Insight: The availability heuristic means that when making judgements we substitute the objective facts with a subjective impression base on the ease with which instances come to mind.
Insight: The unexplained unavailability heuristic is closely related - we can make poor judgements or assumptions just because we cannot think of examples.
Insight: Framing of decisions have a large influence on the choices people make.
Reference: Thaler and Sunstein defining choice architecture in the book Nudge
Insight: High cognitive load makes people more likely to be selfish, use sexist language, and make superficial judgements.
Insight: High cognitive load can weaken self control.
Definition: When people judge the conjunction of two events to be more probable than one of the events in a direct comparison.
Example: The Linda Problem. 'Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations... Which alternative is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement...About 85% to 90% of undergraduates at several major universities chose the second option, contrary to logic.'
Insight: Greater detail means less probability.
Insight: We are drawn quickly to stories that seem plausible, using representativeness.
Definition: The reluctance of people to part from assets because of ownership.
Example: Concert tickets.
Insight: The endowment effect does not have a significant impact in situations of regular economic exchange. For example the owner of a store does not significantly overvalue goods because of ownership.
Insight: When it is more painful to give up an item than it is pleasurable to obtain it, buying prices will be lower than selling prices.
Reference: Richard Thaler, 1980 - coined the term endowment effect.
Definition: The tendency to like (or dislike) all the qualities of a person - including unobserved qualities - based on a few observations.
Example: When a handsome and confident speaker gets up on stage, the audience will judge their comments more favourably.
Example: We are likely to believe that handsome sportspeople are more athletic.
Insight: Systematic errors are known as biases, and they recur predictably in specific circumstances - the halo effect is one example.
Insight: The halo effect contributes to coherences, as we are likely to match our view of people on one significant attribute.
Insight: As decision makers it is hard to predict the actual experience that outcomes will produce, and how we adapt to that.
Reference: Brickman and Campbell (1971) - hedonic treadmill - rapid adaptation to change causes improvements to be short-lived.
Insight: Hindsight bias leads us to assess the quality of decision making not by whether the process of coming to the decision was sound, but by the outcome.
Insight: Hindsight bias comes with regret, we should aim to avoid it.
Insight: When making decisions we can attempt to avoid hindsight bias by either being extremely thorough or very casual.
Reference: Baruch Fischhoff: I-knew-it-all-along effect: we tend to underestimate how much we are surprised by past events, also known as hindsight bias.
Insight: We tend to focus on the role of skill in explaining the past and predicting the future, and neglect the role of luck - we are therefore prone to the illusion of control.
Insight: The Mere Exposure Effect does not depend of consciously being familiar with the stimulus. In fact it is stronger for stimuli that the individual never consciously observes.
Reference: Robert Zajonc, studied the link between repeated stimuli and liking it. Termed it the Mere Exposure Effect.
Reference: In nature we are biologically wired to react cautiously to new things, often with withdrawal and fear. Zajonc argued that, generally, repeated exposure to a stimulus is followed by nothing bad, and is thus a safety signal.
Definition: Flawed stories of the past shape our views of the world and expectations about the future.
Insight: Narrative fallacies arise from our attempt to make sense of the world.
Insight: Stories provide a simple and coherent account of people's actions and intentions, regardless of truth.
Insight: Stories are simple, concrete rather than abstract.
Insight: Stories often remove the role of luck and randomness and assign a role to talent, stupidity, or intentions.
Insight: Stories focus on what happened or what survived, rather than the many events that didn't happen.
Insight: We constantly fool ourselves by creating history.
Reference: The narrative fallacy was coined by Nassim Taleb, The Black Swan.
Definition: Plans and forecasts that are: (1) close to best-case scenarios (2) could be better by looking at similar examples.
Example: Building contractors make most of their profits on additions to plans, reflecting customers inability to plan effectively.
Insight: Greatest responsibility for the planning fallacy is decision makers that approve the plan.
Insight: A challenge facing organisations is executives in different departments presenting overly optimistic plans as they compete for resources.
Insight: When outcomes are uncertain or there are risks.
Principle: Recognise the need for an outside view.
Principle: Forecast from other similar projects.
Principle: Organisations should reward planners for execution according to plans, and penalise the failure to anticipate difficulties.
Principle: Make decisions based on research and rational view of probabilities.
