Tuesday, 10 November 2015

Top 20 decision-making biases and heuristics: Part II

In part II we continue our countdown of the twenty most common decision making biases and heuristics.

11. Loss aversion

We kick off with experience of loss aversion, which has been tied to the endowment effect, sunk cost trap and even the status quo bias. The pain of losing is felt stronger relative to the pleasure of gaining. How much you ask? Almost twice as much! This makes people twice as likely to take risks to avoid losses.

12. Prospect theory
The behavioural model of Prospect theory is a central component of loss aversion. The prospect theory model shows how people make decisions between choices that involve risk or uncertainty. The “S” shaped graph is steeper for losses than for gains, which supports the theory of loss aversion.

Source: https://econfix.files.wordpress.com/

13. Gamblers fallacy

Past results do not represent future outcomes. The gamblers fallacy occurs when a person assumes a run of results one-way means that the other result is more likely. If you flip a coin ten times in a row landing on heads every time, it does not mean the next flip will be any more likely to result in it landing on tails. Similarly, a sports team who looses a number of games in a row is no more likely to win the next game based on the justification that they are ‘due a win’.

14. Peak-end rule

The two moments which are most memorable to people are the peak and the end. This has huge implications on marketing, particularly in the way that a product or service is evaluated.

15. Halo effect

The halo effect bias results in a person perceiving the qualities in one thing relating to the perceived qualities of another. The halo effect is frequently present in advertising where a company associates itself with another to receive its positive benefits.

Source: http://www.brandingstrategyinsider.com/

16. Herd behaviour

When people or groups of people end up doing what others are doing, this is usually a result of herd behaviour. This mentality is particularly prevalent in the finance industry where stock market bubbles appear due to investors following each others' behaviours.

17. Hindsight bias

Have you ever watched a movie with a friend who exclaims at the end, ‘I knew it all along!’. Everything is easier in hindsight. This bias can distort judgments about the probability that an event will occur because the outcome of the event is perceived as predictable.

18. Habit

Many decisions we make are often as a result of habit. These patterns of behaviour build over time in specific situations. The repetition builds associative learning with triggers than cue typical responses.

19. Optimism bias

On the whole, people are much more likely to overestimate the probability of a positive event occurring and underestimate the probability of a negative event. This is often associated with the term ‘rose coloured glasses’.

Source: https://cdn.psychologytoday.com

20. Representativeness heuristic

Representativeness is a general heuristic where by a person judges the probability that characteristic A belongs to group B by judging the degree to which A represents B. This assumption is largely based on stereotyping when judging how one thing represents another. The representativeness heuristic is highly prevalent where detailed scenarios can serve to mislead people in to error. 

Robert Brunning
Current student in the Master of Marketing program at the University of Sydney Business School

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