Friday, January 21, 2011

So You Think You are Rational ?


Confused? No sweat. Not everybody is a Bertrand Russell or a Sigmund Freud.
Here is the fact of the matter - Instead of always arriving at the most logical or most rational decision , our mind intutively tends to arrive at an in-between consensus or solution referred to as ‘Bounded – rationality’  a term coined by noted psychologist Herbert Simon. Now don’t get psyched out by terminology. It just means that we exhibit some element of bias in reasoning and decision making but try our best at coming to a ‘good-enough’ decision.

What could be those factors which affect our supposedly rational decision making process?

Heuristics are mental shortcuts that we take in order to arrive at quick decisions. These shortcuts are prone to certain biases some of which are listed below.

1.Availability Heuristic – We tend to believe more of what is made available to us or what is pointed out to us repeatedly. A few stories in the front pages of major newspapers on farmer suicides provides the necessary public ammo and emotional impact to bully the government into writing off farm loans thereby bringing huge losses to the state exchequer. Here no effort is taken to study the actual situation which has brought about the unfortunate tragedy.

2.Representativeness Heuristic- Just because you predicted the last two cricket match outcomes correctly does not mean you will predict the third and fourth match outcomes correctly. Nevertheless, you would brim with confidence on your ability to do so base on the frequency of the past two predictions being correct.  The same goes for early successes attained in the stock markets by a beginner.

3.Anchoring and Adjusting Heuristic - Anchors are reference points to which our choices and decisions tend to deviate to after adjusting for minor changes.  This could be used when negotiating fares even with your autorickshaw driver. Anchors could be laid by either of the parties involved in a negotiation. But the person who initially offers the first value ( which will act as the anchor) stands to win as the outcome tends to focus on that particular value going forward in the negotiation.

4.Affect Heuristic – This is one of the most prominent biases which affect decision making. That emotions influence our reasoning is no brainer. It is precisely this bias which is used by marketers and advertising professionals to influence the purchasing power of customers. Why else would people prefer to have one soft drink over the other when both of them taste almost the same? (Eg:- Coke Vs Pepsi)

3 comments:

  1. I have learnt a new word, heuristic and yes, this is how influences work, with or without those high sounding names. A new branch of knowledge, however.
    Amma

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  2. Good to know that you believe in Heuristic method to a certain extent, but if you combine ESP,EQ and LOGIC you can be more successful.....good to know that you are an MBA.

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  3. Thanks for going through the post sir.I find being 'Aware' about concepts more important before jumping into belief's.

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