Heuristic And Bias Of Decision Making - 2375 Words

Heuristic and bias in decision-making If I was given A$50,000 to invest on a portfolio of stocks, what should I choose as a starter without any experience on shares? According to van der Pligt (2001) the study of human decision-making is an interdisciplinary project including economics, statistics as well as psychology, and moreover, decision making behavior involving almost all branches of psychology. After three weeks’ simulation of trading on Australian Stock Exchange, in retrospect, I amazingly find there are substantial bias impacts on my decision with respect to choosing, selling and keeping stocks. The following table lists the most fundamental heuristic or bias I had during the time I made decisions for stocks: Table 1: Decision Heuristic/Bias Heuristic/Bias Buying Holding Selling Regression to the Mean +/- + - Gambler’s Fallacy + + 0 Confirmation Bias 0 + + Efficient Market Hypothesis - 0 0 Explanation of symbols: + overemphasis of the heuristic/bias - overlook of the heuristic/bias 0 absence of the heuristic/bias Regression to the Mean Regression to the mean is the law of nature that if the observations are higher or lower than the average measurement, the expected value’s tendency progresses toward the mean (Week 4 Lecture Slides). More or less, we have some basic statistical knowledge learnt whether from schools or through our past experience. Consequently, we are aware of the importance of the meanShow MoreRelatedDecision Making A Rational Approach1572 Words   |  7 Pagesdemonstrate effective judgment and decision making a rational approach must be taken in order to reach an optimal decision. I am diagnosed with a high functioning form of Obsessive Compulsive Disorder. This condition drives me to act exceptionally irrational in my judgments and decisions. I strive each day to improve my skills and decrease the impact of my irrational fears. With a major of management, my future career undoubtedly be filled with tough decisions and judgment calls that require a calmRead MoreEffective Appraisal Approache s And Its Influence On Investment Decision Making1441 Words   |  6 Pagesof equipment or inventory by owner in order to improve future business. (Kahraman, 2011) Moreover, the part of decision-making acts a crucial role in business investment that depends upon the investor’s profit expectation, the availability to finance the investment and the potential cost of assets. (Virlics, 2013) However, risk and uncertainty are the basic terms to the decision-making framework. Risk can be defined as the probability of outcomes or loss that is caused by internal or external vulnerabilitiesRead MoreEffective Appraisal Approaches And Its Influence On Investment Decision Making1419 Words   |  6 Pagesof equipment or inventory by owner in order to improve future business. (Kahraman, 2011) Moreover, the part of decision-making preforms a crucial role in business investment that depends upon the investor’s profit expectation, the availability to finance the investment and the po tential cost of asset. (Virlics, 2013) However, risk and uncertainty are the basic terms to the decision-making framework. Risk can be defined as the probability or threat of outcomes or loss that is caused by internal orRead MoreThe Implications Of Prospect Theory814 Words   |  4 Pageswillingness, which means greater risk aversion for precautionary decisions under risk (Kusev, P., van Schaik, P., Ayton, P., Dent, J. Chater, N. 2009). These are called heuristics and biases in decision making. In this part, other heuristics and biases of framing of the problem, gambler’s fallacy and overconfidence will be discussed in depth with respective example and ACAR of its significance on process of making decisions. Firstly, the bias is framing of the problem. When people frame the problem inRead MoreProspect Theory And Expected Utility Theory1419 Words   |  6 PagesNegotiations and decisions are act as key counterparts in every business. A clear definition as well as the recognition of core elements surrounding the decision making process is required to reach a suitable decision. These approaches purpose to be achieved clear concerns before a final decision-making. This paper will outline prospect theory and discuss the differences between prospect theory and expected utility theory. Following will be, as explanation of the biases and heuristics of the investmentRead MoreEthics And Supports Appraisal Activities1142 Words   |  5 Pages Analyzing Heuristics There are a few heuristics recorded all through the case study that go about as a particular general guideline or contention that were the most relevant to the conflict in this case and supports appraisal activities. Commonly, these heuristics are one-sided and in light of general understanding, which may not fit every last circumstance. Perusing the transcripts, a few employees made remarks that reflected such heuristics. Michael expressed, â€Å"this is a really tough environmentRead MoreHeuristic Thinking Is The Refined Mental Process People Use When Faced With An Alternative1225 Words   |  5 PagesHeuristic thinking is the refined mental process people use when faced with an alternative. Such decisions are typically made quickly and unconsciously. Quickly making a decision without thinking through every detail can be advantageous but it can lead to biases and inconsistencies. There are four common biases caused by heuristics; relative comparisons, availability, representative ness, and affective. The first bias, relative comparison, is when people criticize based off of correlation or affiliationRead MorePalm Inc Analysis Essays1589 Words   |  7 PagesManagers/CFOs often use heuristics for valuation purposes as opposed to traditional methods such as the DCF. Metrics such as the ones used by Palms CFO, the P/E and price-to-sales, are often easier to use and require less research and fewer variables. However, relying on such metrics can lead to the affect heuristic. DCF is the methodology that should be used to ensure the fundamental value is accurate. The application of heuristics in valuation is often subject to bias. The bias can stem from incorrectRead MoreEthics And Supports Appraisal Activities1144 Words   |  5 PagesAnalyzing Heuristics There are a few heuristics recorded all through the case study that go about as a particular general guideline or contention that were the most relevant to the conflict in this case and supports appraisal activities. Commonly, these heuristics are one-sided and in light of general understanding, which may not fit every last circumstance. Perusing the transcripts, a few employees made remarks that reflected such heuristics. Michael expressed, â€Å"this is a really tough environmentRead MoreChapter 8 : Behavioral Economics1490 Words   |  6 Pagesimportant to me for many reasons. Mostly to reverse already previously ingrained bad habits from my child development, to have the knowledge and skills to prevent myself from taking any new bad habits, and to better correct my decisions based off any of the biases and/or heuristics that I may be affected by, especially inadvertently. Also, it just burns my curiosity, very deeply, to understand behavior from a very macro view of society and humans. To begin with, System 1 is the automatic, emotional