What are heuristics?

Heuristics are our usual answers to our human limitations. Remember our last article on the three human boundedness? 

1. Bounded rationality
2. Bounded will power
3. Bounded self-interest

They are simple rules of thumb, which we use to form judgment and make decisions. These are our guesstimates that we use when we satisfice, as we discussed in our last article. Unfortunately, these mental shortcuts that usually involve focusing on just a single aspect in solving a complex problem lead to systematic errors called cognitive biases.

Daniel Kahneman and Amos Tversky demonstrated the shortcuts we use in a wide range of judgments in their paper Judgment Under Uncertainty: Heuristics and Biases and their study "Prospect Theory: An Analysis of Decisions Under Risk" in 1979. Kahneman, a psychologist, received the prestigious Nobel Prize for Economics in 2002 for this milestone study. Unfortunately, Tversky had already died in 1996 and the Nobel is not given posthumously. 

Here are some exercises that you can do to check your predisposition to use heuristics.

Exercise 1:

Aling Puring’s Carinderia offers students a merienda meal of ensaymada at gulaman drink for Php110.00. If the ensaymada is Php100.00 more than the gulaman drink, how much does the gulaman drink cost? (Please try to answer before you continue reading.)

What is your answer?

Did you say P10.00? Is that your final answer? If it is, your heuristic is wrong.

Why? Because if the gulaman drink is P10.00, then the ensaymada will be P110.00 (remember the ensaymada is 100 more than the gulaman). So, that would make their total cost P120.00 (10 + 110) and not P110.00, as stated in the question.

The correct answer is P5.00. The gulaman is P5.00 and the ensaymada is P105.00, making their total cost P110.00.

Exercise 2:

At the height of the Covid-19 pandemic, there was a great demand for face shields. Supposing you had five 3-D printers that took five hours to make five face shields. You received a donation to buy more printers increasing your total capacity to 100 machines. How long will it take your 100 3-D printers to make 100 face shields? (Please try to answer before you continue reading.) 

What is your answer? 

If you answered anything lower than five hours because you assumed increase in efficiency, you’re wrong. Well, you’re also wrong if your answer is anything else other than five hours. The answer is five hours.

Beware:

It may seem harmless to miscompute similar problems due to heuristics, but there are numerous instances where relying on guesstimates can bring us into serious troubles. For one, if you see a loan advertised to just have 3% interest rate, you may assume that you will just pay Php3.00 for every Php100.00 you will borrow. You have to find out the other details of the loan. Is it an annual interest rate or monthly? Do they compute interest on the diminishing balance of your loan or do they continue to use the original loan value?

One of the most dangerous use of heuristics that we suffer from is what happens during elections. Time and again, instead of using our Makatwirang Mak to pick our public servants rationally, we rely on our Emotional Emong to make that quick choice then use our Makatwirang Mak to justify our decision, ignoring facts that are readily available. Oftentimes, we vote with our middle finger. No wonder, we end up electing clowns (oops… apologies to the clowns for this comparison) to very important posts that affect our lives. We even end up losing friends and relatives in the heat of election campaigns. 

May this short discussion on heuristics remind us that in solving important issues, we have to pause and really summon our Makatwirang Mak in order to come up with the right solution.

Announcements

1. To know more about heuristics, cognitive biases, and other discussions that affect the way we deal with money, get your copy of FQ Book 2 or buy the entire trilogy at a package discount! Click here to place your order. 

2. It’s still Valentine month, so let me invite you to watch our last YT video discussing When Forever is Taking Forever. 

3. Do you know where you are now in your FQ Journey? Take the FQ Test, click here.

This article is also published in FQMom.com.