Procrastination

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Bias against action leads people to procrastinate making first-choice investments. When procrastinating, we may be sacrificing our long-term financial well-being. Individuals do not put enough effort in vital decisions.

Enrolment study

Madrian and Shean (2011) automatic enrolment study showed people are passive about very important economic decision. Assume $410,000 is achieved when deferring taxation until money is withdrawn. Organisations offer economic contributions to their employees up to certain amount. Most companies use “opt in” saving plan where employees must enrol on their own initiative (filling a certain form). Other firms use automatic enrolment which is a default enrolment at a set contribution rate. Employees must make an extra effort if they don not want to participate in the programme.

The difference when switching between “opt out” and “opt in” options is dramatic. When participants are asked to enrol on their own, only 49% do so. In contrast, when research participants were automatically enrolled, 86% stayed in the programme and thus achieved higher economic gains.

Adapted from

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

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 such manner. Mount Everest tragedy In 1996 two Mount Everest expedition teams were caught up in storm high up in the mountain. Both team leaders…

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.

Conjunction fallacy

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

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