1. Interpersonal Skills for Managers
– Psychology in Business
Class 4
Karol Wolski

2. HEURISTICS

3. Heuristics
• When people are faced with a complicated
judgment or decision, they often simplify the
task by relying on heuristics, or general rules
of thumb.
• In many cases, these shortcuts yield very close
approximations to the "optimal” answer, that
which results from purely rational thinking.

4. Heuristics
Uncertanity Gather all information
necessary for rational
judgment
Heuristic
Decision

5. Heuristics
In certain situations, heuristics lead to predictable biases and
Inconsistencies (Porter, 2008).
Uncertanity Gather all information
necessary for rational
judgment
Heuristic
Bias Decision

6. Amos Tversky and Daniel Kahneman

7. Availability heuristic
• 1) Which is a more likely cause of death in the
United States: being killed by falling airplane
parts or being killed by a shark?
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

8. Availability heuristic
• In the United States, the chance of dying from
falling airplane parts is 30 times greater than
dying from a shark attack. Because shark attacks
receive more publicity and because they are
easier to imagine (after seeing the film Jaws, for
example), most people rate shark attacks as the
more probable cause of death. Since information
about shark attacks is more readily available, the
availability heuristic helps explain why people
overestimate the chances of dying in this unusual
way.
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

9. Availability heuristic
• 2) Do more Americans die from a) homicide
and car accidents, or b) diabetes and stomach
cancer?
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

10. Availability heuristic
• More Americans die from diabetes and
stomach cancer than from homicide and car
accidents, by a ratio of nearly 2:1. Many
people guess homicide and car
accidents, largely due to the publicity they
receive and in turn, their availability in the
mind.
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

11. Availability heuristic
• 3) Which claims more lives in the United
States: lightning or tornadoes?
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

12. Availability heuristic
• More Americans are killed annually by
lightning than by tornadoes. Because
tornadoes are often preceded by
warnings, drills, and other kinds of
publicity, the most common answer is
tornadoes. The large amount of information
about tornadoes, coupled with the availability
heuristic, leads to the misconception that
tornadoes are a more frequent cause of
death.
Adapted from The Psychology of Judgment and Decision Making, by Scott Plous. McGraw-Hill Higher Education, 1993

13. Availability heuristic
• The availability heuristic is a phenomenon
(which can result in a cognitive bias) in which
people predict the frequency of an event, or a
proportion within a population, based on how
easily an example can be brought to mind.

14. Availability heuristic

15. Availability heuristic

16. Availability heuristic - example
• Someone is asked to estimate the proportion of words that
begin with the letter "R" or "K" versus those words that
have the letter "R" or "K" in the third position. Most
English-speaking people could immediately think of many
words that begin with the letters "R" (roar, rusty, ribald) or
"K" (kangaroo, kitchen, kale), but it would take a more
concentrated effort to think of any words where "R" or "K"
is the third letter (street, care, borrow, acknowledge); the
immediate answer would probably be that words that
begin with "R" or "K" are more common. The reality is that
words that have the letter "R" or "K" in the third position
are more common. In fact, there are three times as many
words that have the letter "K" in the third position, as have
it in the first position.

17. Representativeness heuristic - example
• Linda is 31 years old, single, outspoken, and
very bright. She majored in philosophy. As a
student, she was deeply concerned with
issues of discrimination and social justice, and
also participated in antinuclear
demonstrations. Please check off the most
likely alternative.
– Linda is a bank teller.
– Linda is a bank teller and is active in the feminist
movement.

18. Representativeness heuristic - example
(Porter, 2008)

19. Representativeness heuristic
http://www.google.com/url?sa=t&rct=j&q=representativeness%20heuristic&source=web&cd=4&ved=0CEgQFjAD&url=h
ttp%3A%2F%2Fwww.turtletrader.com%2Fheuristics.pdf&ei=68uvTr6jDIjBtAaNu41o&usg=AFQjCNERltN_olsjcnVYYn-
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20. DECISION-MAKING AND PROBABILITY
BIASES

21. Anchoring and Adjustment
• Examples
– How many percent of African countries belong to
the United Nations

22. Anchoring and Adjustment
• Used to estimate value or size of quantity
• Start from initial value and adjust to final estimate
• People are influenced by an initial anchor value
– anchor may be unreliable, irrelevant
– adjustment is often insufficient
• People overestimate probability of conjunctive events
• People underestimate probability of disjunctive events
• Anchors may be qualitative:
– people form initial impressions that persist and are hard to
change