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ANCHORING AWAILABILITY HEURİSTİC HEURISTIC IN DECISION MAKING

Definition: Anchoring is a term used in psychology to describe the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.

ANCHORİNG

• Statisticians have consistently measured the effect of the anchor value on the estimate that people make

• For different anchors, people make different estimates• For any given change in the anchor, the estimate tends to change by 55%

of the change in the anchor

Experiment:Business students were told their professor would be doing a 15-minute poetry reading. Half were asked if they would be willing to pay $2 to attend and half were asked if they would be willing to attend if they were paid $2. After answering, students were then told that the poetry reading would be free and were asked if they wanted to attend.

Question:Would the initial anchoring of the experience’s value affect who would attend for free?

Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value. Journal of Economic Behavior & Organization, 1-10.

Initially asked if paid $2

Initially asked if cost $2

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Perhaps students were just

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estimate of unknown quality?

Experiment #2:Now the professor first read poetry for 1 minute so that students actually experienced it. Then one group was asked if they would be willing to pay to attend, the other group if they would be willing to attend if paid.

Question:Would the anchoring effect go away when people were allowed to sample the experience first?Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value. Journal of Economic Behavior & Organization, 1-10.

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Conclusion

•Anchoring shows excessive influence of nearby comparisons •Be intentional about choosing comparisons, instead of automatically using the easy anchor.• You can change your nearby comparisons by changing your

environment or your focus within your environment

The Anchoring and Adjustment Heuristic• People often estimate by adjusting an initial value until a final

value is reached• Initial values might be due to the problem presentation or due to

partial computations• Adjustments are typically insufficient and are biased towards

initial values, the anchor

COGNITIVE BIASESLet’s do a math problem

really quicky, and you have gotta do it in your head

• .

When the psychhologists Dann Kehneman and Amos Tversky tried this with human subjects, subjects on average guessed about two thousand two hundred and fifty,

But now, let's suppose I gave you a different math problem.

What if I gave you this one?

• If you are like Kehneman and Tversky’s subject,your answer might be a bit different here .for this question,their subjects guessed a lot lower.

• On average they said the answer was about 512,• Mathematical estimates is that people get the answers really ,really

wrong.

In fact, the real answer?• Well,for both,its forty thousand three hundred and

twenty.People are off by an order of magnitude,• But the second,even more amazing thing is that people give

diffent answers to the problems,even though they’re just different ways of asking exactly the same question.

WHY DO PEOPLE GİVE DİFFERENT ANSWERS TO THE SAME QUESTİON ?

• The answer lies in how we make estimates when you have lots of time to do a math problem like 8*7*6*5*4*3*2*1,you can multiply all of the numbers together and get an exact product.

• But when you have to do the problem quickly,youdont really have to finish.

• So you start with the first numbers.• You multiply 8*7,and get 56.and then you have gotta multiply

that by 6,and, well, you are guessing the final number’s gotta be pretty big,bigger than 56, like maybe 2000 or so

• But when you do the second problem,you start with 1*2,and,well,that’s only 2,and 2 times 3’s only 6.

• Your answer’s gonna be pretty small,maybe like 500 or so.

• This process of guessing based on the first number you see is what’s know as ‘’anchoring’’

• The first number we think of when we do our estimate is the anchor,

• And once we have an anchor in our head,well,we sort of adjust as needed from there, the problem is that our minds are biased not to adjust as much as we need to,the anchors are cognitively really strong,

Kehneman and Tversky discovered that this ,sort of anchoring bias happens all the time ,even for anchors that are totally arbitrary.

For example,they asked people to spin a wheel with numbers from one to a hundred, and then asked them to estimate ,

What percentage of countries in the United Nations are African.

• People who spun a ten on the wheel estimated that the number was about twenty –five percent .

• But People who spun a 65%estimated that the number was 45%

In another experiment, Dan Ariely and his colleagueses had people write down the last two digits of their social security number.

• They were then asked whether they would pay that amount in dollars for a nice bottle of wine

• Ariely and colleagues found that people in the highest quintile of social security numbers would pay three to four times as much for the exact same good.just setting up a larger anchor can make a person who would pay eight dollars for the bottle of wine be willing to spend 26 dollars instead.

Sadly for us,sales people use anchors against us all the time.★How many times have you noticed a salesperson or an advertisement anchoring you to a particulary price,even to how much of a particular product you should buy?

• Whether it’s buying a car or sweater,or even renting a hotel room,our intulitions about what prices are reasonable to pay often come from some arbitrary anchor

So,the next time you are given an anchor, take a minute to think!

• Remember what happens when you drop your anger too high,and than consider thinking of a very different number.

• It might affect your final estimate more than you expect.

Adjustment and Anchoring

• Make estimates by choosing an initial value and then adjusting this starting point up or down until a final estimate is obtained– Most subjectively derived probability distributions are too narrow

and fail to estimate the true variance of the event– Assess a set of values, instead of just the mean

Example

•Mike is finishing his CMU MMM degree. He is very interested in the arts and at one time considered a career as a musician. Is Mark more likely to take a job:

a. In the management of the arts?b. A medical management position?

What is a heuristic?

• “Mental shortcut” used in judgment and decision making– Essential for living in an uncertain world– But they can lead to faulty beliefs and suboptimal decisions– By looking at errors and biases, we can learn how people are reasoning

under uncertainty– Kahneman & Tversky, "People rely on heuristic principles to reduce the

complex tasks of assessing probabilities to simpler judgmental operations." I'll briefly discuss some experiments and examples about the three heuristics from this paper.

Heuristics and Biases

• Heuristics are “rules of thumb” that can make a search process more efficient.

• Most common biases in the use of heuristics– Availability– Adjustment and anchoring– Representativeness

• A. Tversky and D. Kahneman. 1974. “Judgement Under Uncertainty: Heuristics and Biases.” Science, 185:1124-31

Anchoring HeuristicThe Anchoring Heuristic, also know as focalism, refers to the human tendency to accept and rely on, the first piece of information received before making a decision. That first piece of information is the anchor and sets the tone for everything that follows. Anchoring Heuristic – initial value is used as a basis for estimating a whole series of values (leads to insufficient or incorrect conclusions)

For example, a car dealer might suggest a price for a car and the customer will try to negotiate down from that price, even if the price suggested is more than the Blue Book Value.(Psychology Glossary)

We are faced with countless decisions

everyday…

Some are simple , some are complex

To simplify the decision-making process,We use

HEURİSTİCSAlso referred to as ‘rules of thumb’

Or‘cognitive shortcuts’

Here is an example …

You step outside to take a call

Its HOT !

So the next day when you get a call,

You stand under a tree .

You probably didn’t stop and assess the entire situation.

Or calculate the temperature difference from yesterday.

You used a heuristic to make a quick decision using little mental effort.

It’s a practical method,

Not guaranteed to be optimal,But sufficient for making quick decisions.

ADVANTAGE DİSADVANTAGE

Speed Potential for making inaccurate decision

• Unfortunately, we tend to be too cautious in the adjustment phase• As a result, the initial anchor tends to heavily influence our final

estimates• Our final estimates tend to get biased by our anchoring heuristics

The representativeness heuristic

Making judgement based on

the similiarity of an object or person

To an existing ‘persona’

Representativeness heuristic

•Kahneman and Tversky (1982) explained these results using the representativeness heuristic

tendency of people to judge probabilities or likelihoods according to how much one thing resembles another

Let’s look at an example…

Meet joa meet jim Which person do you

think belongs to aWrestling league ?

Joe’s body type is similar existing personals of other wrestlers.

Therefore, most people would choose Joe .

In this scenario, they are correct

Which one is professor or homelessIf you see someone in train or somewhere , what do you think ?

Be careful not to get caught up in the representative heuristic When you judge someone using the representativeness

Heuristic, you may be surprised at the true outcome…

Because of Grigori Perelman solved one of Maths greatest mysteryAnd he declined the Fields Medal and a $1,000,000 prize

Availability

• Egocentric allocations of responsibility: “Overclaiming”• People claim more responsibility for collective endeavors than

is logically possible• Self-allocations sum to more than 100%• Why? Because one’s own contributions are more available

than those of others

Availability

• Experimental evidence• Married couples asked to allocate responsibility for:

– Positive events: Making breakfast, planning activities, shopping for family, making important decisions

– Negative events: Causing arguments, causing messes, irritating spouse• Results:

– Overclaiming occurred for 16 of 20 activities– Equivalent overclaiming for positive and negative events

Ross & Sicoly, 1979; Kruger & Gilovich, 1999

The Availability Heuristic

“assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind” (T&K, 74: 1127)

The availability Heuristic

Making a choice based on Immediate and Easy examples

That come to mind when evaluating a decision

Why use the availability heuristic?•Availability is based on fundamental aspect of memory search

•Works well under many circumstancesAvailability correlates with likelihood of events

Meet jill

Which is more likely ? a)Jill is an astronaut

b)Jill is a teacher

You can probably come up with several examples of teachers you

know or have heard of around the world.

But how many astranouts can you think of ?

Examples of teachers are generally easier and quicker to identify than astronauts.

Therefore, a person is more likely to choose ‘teacher ‘as the answer.

a)Jill is an astronautb)Jill is a teacher

The recognition Heuristic

Making a choice among a set of alternatives

By placingHigher value

On the alternative That you recognice

Which city has more inhabitants?

a)zuirch b)basel

To most people, zuirch is the more recognizable alternative

Therefore, they are more likely to choose ‘Zuirch’ as the answer

Example 1

•Which is riskier (probability of serious accident):a. Driving a car on a 400 mile trip?b. Flying on a 400 mile commercial airline flight?

Example 2

•Are there more words in the English language a. that start with the letter r ?b. for which r is the third letter?

TOP 4 CAUSES OF DEATH ? POLAND / TURKEY /PORTUGAL

1. (a) traffic accidents (b) cancer

2. (a) homicide (b) suicide

3. Other

POLAND WHO 2014-2015 updates

TURKEY

PORTUGAL

Deaths

%Death (a year)

%

1. Coronary Heart Disease 89,184 26.922. Stroke 64,478 19.473. Lung Cancers 23,375 7.064. Lung Disease 11,953 3.61

1. Coronary Heart Disease 95,573 25.612. Stroke 64,583 17.303. Lung Cancers 21,690 5.814. Lung Disease 19,218 5.15

8. Road Traffic Accidents 8,948 2.40

16 Road Traffic Accidents 4,604 1.39

1. Stroke 12,757 17.012. Coronary Heart Disease 8,312 11.093. Influenza and Pneumonia 6,202 8.274. Diabetes Mellitus 4,694 6.26

19 Road Traffic Accidents 1,114 1.49

Summary: Heuristics and Biases• Heuristics are rules of thumb that we use to simplify decision making.• Overall, heuristics result in good decisions. On average any loss in quality of decision

is outweighed by the time saved. • But, heuristics can cause biases and systematic errors in decision making when they

fail. • In addition, we are typically unaware of the heuristics and biases, and fail to

distinguish between situations in which their use is more and less appropriate.

Kahneman and Tversky identified three judgmental heuristics – all of which involve associations.

• Availability Heuristic -- People assess the probability of an event based on the degree to which instances are readily available.

If you can think of it, it must be important. • Anchoring Heuristic: People start with an anchor then adjust up or down, but their

adjustments are often insufficient. Initial associations are hard to shake off.

• Representativeness Heuristic: People often think about the resemblance between an object and a larger reference class.

If two things are similar, the probability of one given the other must be higher.

How Can This Be?

• If people just try hard enough, the errors and biases in human judgment will usually take care of themselves. True or False?

• The market takes care of these issues – the fittest will survive and the biases will vanish. True or False?