Heuristic, Bias, and Effect

In this video, we are not going to look at any particular behavioral economics principle as we usually do but rather we are going to look at some foundational concepts. There are other foundational concepts than what I would cover today but if you have to start learning about behavioral economics it's good to clarify these concepts first as without understanding these concepts, it would be almost impossible to learn behavioral economics. Let’s see what those are. 

If you look carefully, most behavioral economics principle names will have terms such as Heuristics, Bias or Effect. For example - Action Bias or Availability Heuristics or Bandwagon Effect. We are going to see what these three terminologies mean in behavioral science and economics - Heuristics, Bias and Effect. 

Let’s see them one by one...

Heuristics 

Heuristics are cognitive shortcuts that help us make quick judgements and decisions based on whatever information we have from our past experiences and whatever information is in front of us. 

These are shortcuts or rules of thumb that simplify decision making, especially under conditions of uncertainty. Heuristics isn’t about making a perfect decision but it is more about making a decision quickly. We have to make a lot of decisions everyday such as what to eat, what to wear, what tasks to complete etc. We don’t really analyse each and every decision every time, rather rely on our heuristics or shortcuts. 

Let’s take an example of Availability Heuristic. Availability heuristic is a mental shortcut that leads us to draw conclusions or judgements based on what example, instance, or case comes to mind immediately. 

To take an example, investors may judge the quality of an investment based on information that was recently in the news, ignoring other relevant facts and even historic trends. 

Heuristics represent a process of substituting a difficult question with an easier one. 

So the difficult analytical question would be - How best this stock has performed over the last 5 or 10 years and under which context and circumstances but an easier substitute question to take a quick decision, we may simply ask - How is the stock currently performing? 

Next time you see explanations for these terms, you know what Heuristics mean - Mental Shortcuts to take quick decisions or make a judgement.. 

• Affect Heuristic 

• Representativeness Heuristics 

• Anchoring Heuristics 

• Availability Heuristic 

Heuristics can lead us to biases. For example, I may decide to vote for a particular political party based on what I heard in the news recently rather than analysing a political party’s performance over a longer period of time. 

That brings us to Biases. You will read or hear this term a lot by behavioral economists. Let’s see what that is. 

Bias 

Bias means that information comes from a particular viewpoint and it may try to persuade you to a particular way of thinking. Bias may be intentional or unintentional. Bias can be presenting to you the best possible image of an issue but reality could be entirely different. It aims to persuade you to a particular point of view. 

For example, Optimism bias 

Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism.

if you are planning to go to Delhi and do research online. If you go to the Delhi government website, it will ofcourse show Delhi in the best possible light but if you visit tourist blogs or youtube videos might show you information of other perspectives of Delhi. Similarly, some news channels can be biased because they have some vested interest in a certain political party. 

There are many biases discussed in Behavioral Economics. 

Next time you see these terms, you already know what bias means - An information trying to persuade you in a particular direction. Now let’s see what Effect means. 

• Action bias 

• Confirmation bias 

• Hindsight bias 

• Optimism bias 

• And more….

Effect  

Effect is an event or a state that is brought about as the result of another root cause, event or a state. 

Example - Goal Gradient Effect

Goal Gradient Effect states that as people get closer to a reward, they speed up their behavior to get to their goal faster. In other words, people are motivated by how much is left to reach their target, not how far they've come.

So in this case, the result is speeding up but the root cause is reward. 

There are many Effects discussed in Behavioral Economics. 

Next time you see explanations for these terms, you know what Effect means - Root cause and a result. 

• Bandwagon Effect 

• Endowment Effect 

• Goal Gradient Effect 

• Halo Effect 

• And more….

We will look at each Behavioral Economics principle in detail in upcoming videos but I think these three basic concepts are extremely important if you are learning behavioral economics. There is another concept called ‘Nudge’ which we will see in the next video. 

I hope you liked my explanation on the basic concepts of behavioral economics. If yes, please press the Like button. Also Subscribe to my channel and press the Notification bell so that you will always get to know when I upload a next video. 

THank you for watching. Bye bye