# Common biases in decision making

In general there are three general heuristics namely availability, representative and confirmation heuristics. They encompass eleven specific biases.

# Cognitive bias

Economists claim individuals are rational decision makers. They collect a lot of information, examine all alternatives and make decisions that maximise personal satisfaction. However, we do not make decisions in…

# Heuristic definition

Individuals rely on rules of thumb (heuristics) to lessen the information processing demands of making decisions.

# Availability heuristic

The inferences we make about event commonness based on the ease with which we can remember instances of that event.

# Retrievability bias

We are better at retrieving some subjects from our memory than other things. Individuals base judgement on commonality and easier base strategies.

# Base rate fallacy

People tend to ignore background information relevant to the problem such as base rate. We tend to assume that causes and consequences are related.

# Gambler’s fallacy

Simple statistics claims each event in a sequence is equally likely to occur. But individuals believe random and non-random events will balance out.

# Small sample size fallacy

Simple statistics state that we are more likely to observe an unusual event in a small sample compared to a large one. Learn more.

# Regression to mean definition and example

People predict they will repeat their previous performance exactly. Statistics tells us that extreme performance is likely to regress to the mean over time.

# Conjunction fallacy

Describes how conjunction is judged to be more probable than a single component descriptor. Intuitively thinking, something appears to be more correct.

# Confirmation trap

People naturally tend to seek information that confirms their expectations and hypothesis, even when evidence is disconfirming or falsifying.

# Anchoring bias

We often develop estimates by starting initial anchor that is based on whatever information is provided and adjust from the anchor to yield a final answer.

# Conjunctive and disjunctive events bias

We tend to have general bias to overestimate the probability of conjunctive events and the underestimate the probability of disjunctive events.

# Highsight bias

Occurs when people look back on their own judgements and those of others. We tend to overestimate what we know beforehand based upon what we later learned.

# Bounded awareness

Initially, groups are pooled together to share information but end up spending time discussing already shared knowledge. Groups face bounded awareness.

# Framing effect in decision making

How perceived differences based on a change in the “framing” of choices can dramatically affect how people make decisions.

# Pseudocertainty

Under pseudo certainty effect, we are more likely to favour options that assure us certainty than those that only reduce uncertainty.

# Overselling of insurance

When buying a car, we purchase warranty. Vividness of repair, social norm favouring insurance and warranties leads consumers to make risk averse choices.

# Mental accounting

People have a variety of “mental” accounts that they use to organise, evaluate and keep track of a variety of financial activities such as monthly budget.

# Endowment effect

Most people value what they own than the value of the same good that they do not own. Home sellers think their houses are worth more than most buyers do.

# Preference reversal

People place higher value on one option compared to a several options when looking at them individually. Individuals reverse their preferences.

# Escalation of commitment

Many managerial decisions concern a series of choices rather than isolated decisions. We are prone to bias when approaching decisions serially.

# Unilateral escalation of commitment

We escalate commitment because of our own previous decisions. How should be separate between rational and non-rational tendency to escalate?

Escalation can occur in bid auctions where many sellers compete with one another to offer the highest or lowest price to the buyer.

# Causes of escalation of commitment

Escalation of commitment occurs because of psychological factors such as perceptual and judgemental biases, as well as impression management.

# Anchoring

Present your brain with a number and ask to make an estimate of something irrelevant. Our brain anchor its estimate on the first number.

# Procrastination

When procrastinating, we may be sacrificing our long-term financial well-being. Individuals do not put enough effort in vital decisions.

# Status quo bias

CEOs are reluctant to sell their business even though this might result in a better position for the firm. This can be explained by theories.

# Prospect theory: selling winners, keeping losers

Investors have strong preferences to hold on to stocks that are selling below purchase price so that could avoid being “losers”. Instead, they sell stocks that are selling above the…

# In group favouritism and groupthink

We like people like ourselves. Individuals who went to the same college, work with us or are the same race.