Heuristics are mental shortcuts we use to make decisions faster. One of the main ideas of bounded rationality theory is that people don’t have enough time to fully consider every decision they make. If we were all economic-supermen and women, (the so called homo economicus), before making a choice we would identify all the available alternatives, calculate how happy each will make us and pick the best option. This might be how we make really big decisions, but it's too exhausting a process to do constantly.
Instead, we use shortcuts (heuristics) to arrive at decisions that, while maybe not the absolute best, are usually good enough. Heuristics are mental rules of thumb that allow us to jump past all the hard thinking that might otherwise go into a decision. For example, we like to assume that things that worked in the past will work in the future. Most of the times that’s a pretty good assumption, but sometimes it can blind us to changing circumstances. When heuristics make us ignore other information and do unreasonable things, it’s called cognitive bias.
Choosing to eat a dessert when we’re on a diet, or texting whilst driving even though we know it’s dangerous, or shopping compulsively even if our credit cards are begging for mercy can all be explained in part by cognitive biases. Cognitive biases are surprisingly predictable. All around the world, psychologists and economists have found examples of heuristics that cause people to get things wrong over and over again.
Knowing about these systematic errors can help us make better decisions. But it can also be used by governments or businesses to ‘nudge’ people into making certain decisions, like saving for retirement or buying particular things in the grocery store.
The number of different cognitive biases is pretty massive—Wikipedia lists about 175 of them.¹ Here are three of the most famous:
|Representativeness heuristic||Assuming that something belongs to a certain group because it remind us of something we already know in that category.||Assuming that all sweet food is unhealthy, because sugar is sweet, and sugar is unhealthy. Thankfully, not always true!|
|Availability heuristic||Assuming that something is more likely because we can think of it more easily or have heard of it more often.||Assuming everyone living in your neighborhood is your age because most people you know are your age.|
|Anchoring heuristic||Giving too much weight to the first piece of information you learn about something.||Seeing a ‘sale price’ and assuming it’s a good deal because it’s lower than the ‘normal’ price.|