anchoring,representativenes,heuristic Decision Making.

1. Shortsighted shortcuts
we will talk about
ANCHORING
AWAILABILITY HEURİSTİC
HEURISTIC IN DECISION MAKING

2. Definition: Anchoring is a term used in psychology to describe the common human
tendency to rely too heavily, or "anchor," on one trait or piece of information when
making decisions.
ANCHORİNG

4. • Statisticians have consistently measured the effect of the anchor value on
the estimate that people make
• For different anchors, people make different estimates
• For any given change in the anchor, the estimate tends to change by 55%
of the change in the anchor

5. Experiment:
Business students were told their professor
would be doing a 15-minute poetry
reading. Half were asked if they would be
willing to pay $2 to attend and half were
asked if they would be willing to attend if
they were paid $2. After answering,
students were then told that the poetry
reading would be free and were asked if
they wanted to attend.
Question:
Would the initial anchoring of the
experience’s value affect who would
attend for free?
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value.
Journal of Economic Behavior & Organization, 1-10.

6. 8%
35%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Initially asked if paid $2 Initially asked if cost $2
WillingtoAttendforFree
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value.
Journal of Economic Behavior & Organization, 1-10.

7. Perhaps
students
were just
using price
as an
estimate of
unknown
quality?

8. Experiment #2:
Now the professor first read poetry for
1 minute so that students actually
experienced it. Then one group was
asked if they would be willing to pay to
attend, the other group if they would
be willing to attend if paid.
Question:
Would the anchoring effect go away
when people were allowed to sample
the experience first?
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value.
Journal of Economic Behavior & Organization, 1-10.

9. 9%
49%
0%
10%
20%
30%
40%
50%
60%
1st: Willing to attend if
paid?
1st: Willing to pay to
attend?
Willingtoattendforfree
Ariely, D. (MIT), Lowenstein, G. (Carnegie Mellon), & Prelec, D. (MIT), 2006, Tom Sawyer and the construction of value.
Journal of Economic Behavior & Organization, 1-10.

10. •Anchoring shows excessive influence of nearby comparisons
•Be intentional about choosing comparisons, instead of
automatically using the easy anchor.
• You can change your nearby comparisons by changing your
environment or your focus within your environment

11. The Anchoring and Adjustment Heuristic
• People often estimate by adjusting an initial value until a final
value is reached
• Initial values might be due to the problem presentation or due to
partial computations
• Adjustments are typically insufficient and are biased towards
initial values, the anchor

12. COGNITIVE BIASES
Let’s do a math problem
really quicky, and you have gotta do it in your head
• .
When the psychhologists Dann Kehneman and Amos Tversky tried this with human subjects, subjects on average
guessed about two thousand two hundred and fifty,

13. But now, let's suppose I gave you a different math
problem.
What if I gave you this one?
• If you are like Kehneman and Tversky’s subject,your answer might
be a bit different here .for this question,their subjects guessed a lot
lower.
• On average they said the answer was about 512,
• Mathematical estimates is that people get the answers really ,really
wrong.

14. In fact, the real answer?
• Well,for both,its forty thousand three hundred and
twenty.People are off by an order of magnitude,
• But the second,even more amazing thing is that people give
diffent answers to the problems,even though they’re just
different ways of asking exactly the same question.

15. WHY DO PEOPLE GİVE DİFFERENT ANSWERS TO
THE SAME QUESTİON ?
• The answer lies in how we make estimates when you have lots of
time to do a math problem like 8*7*6*5*4*3*2*1,you can multiply
all of the numbers together and get an exact product.

16. • But when you have to do the problem quickly,youdont really
have to finish.
• So you start with the first numbers.
• You multiply 8*7,and get 56.and then you have gotta multiply
that by 6,and, well, you are guessing the final number’s gotta
be pretty big,bigger than 56, like maybe 2000 or so

17. • But when you do the second problem,you start with
1*2,and,well,that’s only 2,and 2 times 3’s only 6.
• Your answer’s gonna be pretty small,maybe like 500 or so.
• This process of guessing based on the first number you see is
what’s know as ‘’anchoring’’

18. • The first number we think of when we do our estimate is the
anchor,
• And once we have an anchor in our head,well,we sort of adjust as
needed from there, the problem is that our minds are biased not
to adjust as much as we need to,the anchors are cognitively really
strong,

19. Kehneman and Tversky discovered that this ,sort of
anchoring bias happens all the time ,even for
anchors that are totally arbitrary.

20. For example,they asked people to spin a wheel with numbers from one to
a hundred, and then asked them to estimate ,
What percentage of countries in the United Nations are African.
• People who spun a ten on the wheel estimated that the number was
about twenty –five percent .
• But People who spun a 65%estimated that the number was 45%

21. In another experiment, Dan Ariely and his colleagueses had people write
down the last two digits of their social security number.
• They were then asked whether they would pay that amount in dollars for a
nice bottle of wine
• Ariely and colleagues found that people in the highest quintile
of social security numbers would pay three to four times as
much for the exact same good.just setting up a larger anchor
can make a person who would pay eight dollars for the bottle
of wine be willing to spend 26 dollars instead.

22. Sadly for us,sales people use anchors against us all the time.
★How many times have you noticed a salesperson or an advertisement anchoring
you to a particulary price,even to how much of a particular product you should
buy?
• Whether it’s buying a car or sweater,or even renting a hotel
room,our intulitions about what prices are reasonable to pay
often come from some arbitrary anchor

23. So,the next time you are given an anchor, take a
minute to think!
• Remember what happens when you
drop your anger too high,and than
consider thinking of a very different
number.
• It might affect your final estimate
more than you expect.

24. Adjustment and Anchoring
• Make estimates by choosing an initial value and then adjusting
this starting point up or down until a final estimate is obtained
– Most subjectively derived probability distributions are too narrow
and fail to estimate the true variance of the event
– Assess a set of values, instead of just the mean

25. Example
•Mike is finishing his CMU MMM degree. He is very interested
in the arts and at one time considered a career as a musician.
Is Mark more likely to take a job:
a. In the management of the arts?
b. A medical management position?

26. What is a heuristic?
• “Mental shortcut” used in judgment and decision making
– Essential for living in an uncertain world
– But they can lead to faulty beliefs and suboptimal decisions
– By looking at errors and biases, we can learn how people are reasoning
under uncertainty
– Kahneman & Tversky, "People rely on heuristic principles to reduce the
complex tasks of assessing probabilities to simpler judgmental
operations." I'll briefly discuss some experiments and examples about the
three heuristics from this paper.

27. Heuristics and Biases
• Heuristics are “rules of thumb” that can make a search process
more efficient.
• Most common biases in the use of heuristics
– Availability
– Adjustment and anchoring
– Representativeness
• A. Tversky and D. Kahneman. 1974. “Judgement Under Uncertainty: Heuristics and Biases.” Science,
185:1124-31

28. Anchoring Heuristic
The Anchoring Heuristic, also know as focalism, refers to the human
tendency to accept and rely on, the first piece of information received
before making a decision. That first piece of information is the anchor
and sets the tone for everything that follows.
Anchoring Heuristic – initial value is used as a basis for estimating a whole series of values
(leads to insufficient or incorrect conclusions)
For example, a car dealer might suggest a price for a car and the
customer will try to negotiate down from that price, even if the price
suggested is more than the Blue Book Value.(Psychology Glossary)

29. We are faced with
countless decisions
everyday…
Some are simple , some are complex

30. To simplify the decision-making process,
We use
HEURİSTİCS
Also referred to as ‘rules of thumb’
Or
‘cognitive shortcuts’

31. Here is an example …

32. You step outside to take a call
Its HOT !

33. So the next day when you get a call,
You stand under a tree .
You probably didn’t stop and assess the
entire situation.
Or calculate the temperature difference from
yesterday.
You used a heuristic to make a quick decision
using little mental effort.

34. It’s a practical method,
Not guaranteed to be optimal,
But sufficient for making quick decisions.
ADVANTAGE DİSADVANTAGE
Speed Potential for making inaccurate
decision

35. • Unfortunately, we tend to be too cautious in the adjustment phase
• As a result, the initial anchor tends to heavily influence our final
estimates
• Our final estimates tend to get biased by our anchoring heuristics

36. The representativeness heuristic
Making judgement based on
the similiarity of
an object or person
To an existing ‘persona’

37. Representativeness heuristic
•Kahneman and Tversky (1982) explained these results using the
representativeness heuristic
tendency of people to judge probabilities or likelihoods according to how
much one thing resembles another

38. Let’s look at an example…

39. Meet joa meet jim
Which person do you
think belongs to a
Wrestling league ?

40. Joe’s body type is similar existing personals of other wrestlers.
Therefore, most people would choose Joe
.

41. In this scenario, they are correct

42. Which one is professor or homeless
If you see someone in train or
somewhere , what do you think ?

43. Be careful not to get caught up in the representative heuristic When
you judge someone using the representativeness
Heuristic, you may be surprised at the true outcome…
Because of Grigori Perelman solved one of Maths greatest mystery
And he declined the Fields Medal and a $1,000,000 prize

44. Availability
• Egocentric allocations of responsibility: “Overclaiming”
• People claim more responsibility for collective endeavors than
is logically possible
• Self-allocations sum to more than 100%
• Why? Because one’s own contributions are more available
than those of others

45. Availability
• Experimental evidence
• Married couples asked to allocate responsibility for:
– Positive events: Making breakfast, planning activities, shopping for
family, making important decisions
– Negative events: Causing arguments, causing messes, irritating
spouse
• Results:
– Overclaiming occurred for 16 of 20 activities
– Equivalent overclaiming for positive and negative events
Ross & Sicoly, 1979; Kruger & Gilovich, 1999

46. The Availability Heuristic
“assess the frequency of a class or the probability
of an event by the ease with which instances or
occurrences can be brought to mind” (T&K, 74: 1127)

47. The availability Heuristic
Making a choice based on
Immediate and
Easy examples
That come to mind when evaluating a decision
Why use the availability heuristic?
•Availability is based on fundamental aspect of memory search
•Works well under many circumstances
Availability correlates with likelihood of events

48. Meet jill
Which is more likely ?
a)Jill is an astronaut
b)Jill is a teacher

49. You can probably come up with
several examples of teachers you
know or have heard of around the
world.
But how many astranouts can you
think of ?

50. Examples of teachers are generally easier and quicker to identify than astronauts.
Therefore, a person is more likely to choose ‘teacher ‘as the answer.
a)Jill is an astronaut
b)Jill is a teacher

51. The recognition Heuristic
Making a choice among a set of
alternatives
By placing
Higher value
On the alternative
That you recognice

52. Which city has more inhabitants?
a)zuirch
b)basel

53. To most people, zuirch is the more recognizable
alternative
Therefore, they are more likely to choose ‘Zuirch’ as
the answer

54. Example 1
•Which is riskier (probability of serious accident):
a. Driving a car on a 400 mile trip?
b. Flying on a 400 mile commercial airline flight?

55. Example 2
•Are there more words in the English language
a. that start with the letter r ?
b. for which r is the third letter?

56. TOP 4 CAUSES OF DEATH ? POLAND / TURKEY /PORTUGAL
1. (a) traffic accidents
(b) cancer
2. (a) homicide
(b) suicide
3. Other

57. POLAND WHO 2014-2015
updates
TURKEY
PORTUGAL
De
at
hs
%
Death (a
year)
%
1. Coronary Heart Disease 89,184 26.92
2. Stroke 64,478 19.47
3. Lung Cancers 23,375 7.06
4. Lung Disease 11,953 3.61
1. Coronary Heart Disease 95,573 25.61
2. Stroke 64,583 17.30
3. Lung Cancers 21,690 5.81
4. Lung Disease 19,218 5.15
8. Road Traffic Accidents 8,948 2.40
16 Road Traffic Accidents 4,604 1.39
1. Stroke 12,757 17.01
2. Coronary Heart Disease 8,312 11.09
3. Influenza and Pneumonia 6,202 8.27
4. Diabetes Mellitus 4,694 6.26
19 Road Traffic Accidents 1,114 1.49

58. Summary: Heuristics and Biases
• Heuristics are rules of thumb that we use to simplify decision making.
• Overall, heuristics result in good decisions. On average any loss in quality of decision
is outweighed by the time saved.
• But, heuristics can cause biases and systematic errors in decision making when they
fail.
• In addition, we are typically unaware of the heuristics and biases, and fail to
distinguish between situations in which their use is more and less appropriate.

59. Kahneman and Tversky identified three judgmental heuristics –
all of which involve associations.
• Availability Heuristic -- People assess the probability of an event based on the degree to
which instances are readily available.
If you can think of it, it must be important.
• Anchoring Heuristic: People start with an anchor then adjust up or down, but their
adjustments are often insufficient.
Initial associations are hard to shake off.
• Representativeness Heuristic: People often think about the resemblance between an
object and a larger reference class.
If two things are similar, the probability of one given the other must be higher.

60. How Can This Be?
• If people just try hard enough, the errors and biases in human
judgment will usually take care of themselves. True or False?
• The market takes care of these issues – the fittest will survive
and the biases will vanish. True or False?