People often make decisions that are not “rational” from a purely economical point of view — meaning that they don’t necessarily lead to the best results. Why is that? Are we just bad at dealing with numbers and odds? Or is there a psychological mechanism behind it?
Sara Garofalo explains what heuristics is - a problem-solving approach based on previous experience and intuition rather than analysis.
The 'loss aversion' phenomenon
Have you heard about the phenomenon called ‘loss aversion’? Under rational economic theory our decisions should follow a simple mathematical equation that weighs the level of risk against the amount at stake. Studies have found that for many people the negative psychological impact they feel from losing something is about twice as strong as the positive impact of gaining the same thing.
Loss aversion is one cognitive bias that arises from heuristics. These are problem-solving approaches based on previous experience and intuition rather than on careful analysis. These mental shortcuts can lead to irrational decisions.
The anchoring effect
Situations involving probability are not suitable for applying heuristics. Heuristics are also terrible in dealing with numbers in general. Another example is the ‘anchoring effect’ which is often used in marketing and negotiations. It raises the prices that people are willing to pay.
The question here is if heuristics lead to all these wrong decisions why do we even have them. Well, they can actually be quite effective - that’s why. For most of human history survival depended on making quick decisions with limited information. When there is no time to logically analyse all possibilities heuristics can sometimes save our lives.
The intuitive answer
However, today’s environment requires far more complex decision making. These decisions are more biased by unconscious factors than we think, affecting everything from healthcare and education to finance and criminal justice. We can’t just shut off our brain’s heuristics but we can learn to be aware of them. Sometimes the intuitive answer might not be the right one after all.
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