A heuristic, or heuristic technique, is any approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, perfect, or rational, but is nevertheless sufficient for reaching an immediate, short-term goal or approximation. Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Heuristics can be mental shortcuts that ease the cognitive load of making a decision.
Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
Daniel Kahneman is an Israeli-American author, psychologist and economist notable for his work on hedonic psychology, psychology of judgment and decision-making, as well as behavioral economics, for which he was awarded the 2002 Nobel Memorial Prize in Economic Sciences. His empirical findings challenge the assumption of human rationality prevailing in modern economic theory.
Amos Nathan Tversky was an Israeli cognitive and mathematical psychologist and a key figure in the discovery of systematic human cognitive bias and handling of risk.
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory.
The representativeness heuristic is used when making judgments about the probability of an event being representional in character and essence of known protyical event. It is one of a group of heuristics proposed by psychologists Amos Tversky and Daniel Kahneman in the early 1970s as "the degree to which [an event] (i) is similar in essential characteristics to its parent population, and (ii) reflects the salient features of the process by which it is generated". The representativeness heuristic works by comparing an event to a prototype or stereotype that we already have in mind. For example, if we see a person who is dressed in eccentric clothes and reading a poetry book, we might be more likely to think that they are a poet than an accountant. This is because the person's appearance and behavior are more representative of the stereotype of a poet than an accountant.
Loss aversion is a psychological and economic concept which refers to how outcomes are interpreted as gains and losses where losses are subject to more sensitivity in people's responses compared to equivalent gains acquired. Kahneman and Tversky (1992) have suggested that losses can be twice as powerful, psychologically, as gains. When defined in terms of the utility function shape as in the Cumulative Prospect Theory (CPT), losses have a steeper utility than gains, thus being more "painful" than the satisfaction from a comparable gain as shown in Figure 1. Loss aversion was first proposed by Amos Tversky and Daniel Kahneman as an important framework for Prospect Theory - an analysis of decision under risk.
Cass Robert Sunstein is an American legal scholar known for his work in constitutional law, administrative law, environmental law, and behavioral economics. He is also The New York Times best-selling author of The World According to Star Wars (2016) and Nudge (2008). He was the administrator of the White House Office of Information and Regulatory Affairs in the Obama administration from 2009 to 2012.
Richard H. Thaler is an American economist and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. In 2015, Thaler was president of the American Economic Association.
The planning fallacy is a phenomenon in which predictions about how much time will be needed to complete a future task display an optimism bias and underestimate the time needed. This phenomenon sometimes occurs regardless of the individual's knowledge that past tasks of a similar nature have taken longer to complete than generally planned. The bias affects predictions only about one's own tasks. On the other hand, when outside observers predict task completion times, they tend to exhibit a pessimistic bias, overestimating the time needed. The planning fallacy involves estimates of task completion times more optimistic than those encountered in similar projects in the past.
The simulation heuristic is a psychological heuristic, or simplified mental strategy, according to which people determine the likelihood of an event based on how easy it is to picture the event mentally. Partially as a result, people experience more regret over outcomes that are easier to imagine, such as "near misses". The simulation heuristic was first theorized by psychologists Daniel Kahneman and Amos Tversky as a specialized adaptation of the availability heuristic to explain counterfactual thinking and regret. However, it is not the same as the availability heuristic. Specifically the simulation heuristic is defined as "how perceivers tend to substitute normal antecedent events for exceptional ones in psychologically 'undoing' this specific outcome."
The Allais paradox is a choice problem designed by Maurice Allais (1953) to show an inconsistency of actual observed choices with the predictions of expected utility theory. Rather than adhering to rationality, the Allais paradox proves that individuals rarely make rational decisions consistently when required to do so immediately. The independence axiom of expected utility theory, which requires that the preferences of an individual should not change when altering two lotteries by equal proportions, was proven to be violated by the paradox.
Michael Monroe Lewis is an American author and financial journalist. He has also been a contributing editor to Vanity Fair since 2009, writing mostly on business, finance, and economics. He is known for his nonfiction work, particularly his coverage of financial crises and behavioral finance.
How Doctors Think is a book released in March 2007 by Jerome Groopman, the Dina and Raphael Recanati Chair of Medicine at Harvard Medical School, chief of experimental medicine at Beth Israel Deaconess Medical Center in Boston, and staff writer for The New Yorker magazine.
In psychology, the human mind is considered to be a cognitive miser due to the tendency of humans to think and solve problems in simpler and less effortful ways rather than in more sophisticated and effortful ways, regardless of intelligence. Just as a miser seeks to avoid spending money, the human mind often seeks to avoid spending cognitive effort. The cognitive miser theory is an umbrella theory of cognition that brings together previous research on heuristics and attributional biases to explain when and why people are cognitive misers.
The Paradox of Choice – Why More Is Less is a book written by American psychologist Barry Schwartz and first published in 2004 by Harper Perennial. In the book, Schwartz argues that eliminating consumer choices can greatly reduce anxiety for shoppers. The book analyses the behavior of different types of people. This book argues that the dramatic explosion in choice—from the mundane to the profound challenges of balancing career, family, and individual needs—has paradoxically become a problem instead of a solution and how our obsession with choice encourages us to seek that which makes us feel worse.
Reference class forecasting or comparison class forecasting is a method of predicting the future by looking at similar past situations and their outcomes. The theories behind reference class forecasting were developed by Daniel Kahneman and Amos Tversky. The theoretical work helped Kahneman win the Nobel Prize in Economics.
Nudge: Improving Decisions about Health, Wealth, and Happiness is a book written by University of Chicago economist and Nobel Laureate Richard H. Thaler and Harvard Law School Professor Cass R. Sunstein, first published in 2008. In 2021, a revised edition was released, subtitled The Final Edition.
Heuristics is the process by which humans use mental shortcuts to arrive at decisions. Heuristics are simple strategies that humans, animals, organizations, and even machines use to quickly form judgments, make decisions, and find solutions to complex problems. Often this involves focusing on the most relevant aspects of a problem or situation to formulate a solution. While heuristic processes are used to find the answers and solutions that are most likely to work or be correct, they are not always right or the most accurate. Judgments and decisions based on heuristics are simply good enough to satisfy a pressing need in situations of uncertainty, where information is incomplete. In that sense they can differ from answers given by logic and probability.
Thinking, Fast and Slow is a 2011 popular science book by psychologist Daniel Kahneman. The book's main thesis is a differentiation between two modes of thought: "System 1" is fast, instinctive and emotional; "System 2" is slower, more deliberative, and more logical.
