2.

2 Types of decision making biases

2.2.1 Heuristic

The bounded rationality leads to the development of less adequate measures of decision making.
Due to limited cognitive abilities the decision maker uses simple model to solve complex
problems by using mental short cuts. These models of decision making are known as heuristic.
However, the decisions selection which are based on heuristics are less efficient than the
decisions selected through optimization model because optimization method takes into account
all the relevant information and uses the best method to select the best alternative. In
contradiction heuristics ignores information in order to attain fast and simplified decision making
(Maitland & Sammartino, 2015).

There are three types of heuristics namely representativeness heuristics,Availability heuristic and
anchoring and judgement heuristcs (Kahneman, Slovic, & Tversky, 1982).

The cognitive system of the decision maker possesses two types of subsystem namely Subsystem
1 and Subsystem 2. Subsystem 1 has automatic regulation, uses little effort and uses heuristics.
Likewise the system 2 is voluntary, needs efforts, based on rules (Epstein, 1994).

2.2.1.1 Availability heuristics

It suggests that the decision maker takes the decisions based on the information that are easy to
recall and that are stored in the memory as common information. It is based upon the ease of
thinking ( Ehrlinger, 2016).

Availability heuristics is used frequently as the decision making tool because it’s easy and fast to
decide something by recalling the events that are most common. The bias appears when the
information that is most common to the decision maker is different than that of the information
that leads to the unbiased decision.

Example: When the people are asked about the capital city of Australia most of the people
abruptly answer Sydney. However, the capital city of Australia is Canberra. Since Sydney is the
most popular city of Australia, people use the ease of recalling the option Sydney while
answering.
In essence those information are cognitively available which are clear in the memory, has visual
and emotional meaning.

The availability heuristics is one of the major causes of egocentric judgment (Ross & Sicoly,
1979). For example: Most of the employees in the organization believe that their suggestions,
strategy or plan is more important than that of their colleagues. The bias arises from a tendency
to simply know more about own strategy and its outcomes than that of their colleague. Similarly
the employees weigh their contribution to be more than that of other employees due to the effect
of availability heuristics.

2.2.1.2 The anchoring and adjustment heuristics

Example: When a person is asked the establishment date of International Bank of Reconstruction
and Development, most people do not know the exact year of its establishment. But many people
do know when the Second World War ended. The end year of the world war will be taken as the
reference point of estimating the likely date of the establishment of the IBRD. The last year of
the world war two is taken as the judgmental anchor and then adjusting from that anchor in order
to arrive at an estimated value or likelihood is referred to as an anchoring adjustment. Tversky
and Kahneman (1974) first defined heuristics that allows people to make reasonable and
educated estimate of the day to day judgment. However it may lead to cognitive bias when the
anchored judgment is different than that of the correct alternative.

2.2.1.3 Representativeness Heuristic

Its creates bias when a person relies on the single case, event or information that is representative
to a particular category, group, phenomenon or the stereotype Tversky and Kahneman’s (1974).
Illustration: People tend to believe that in case of women the risk of breast cancer is greater than
that of the heart disease. In fact heart disease is more common in the women than that of the
breast cancer (Woloshin, Schwartz, Black, & Welch, 1999).

2.2.2 Overconfidence

Overconfidence results in majority of the cognitive bas. It is the tendency to put more weight on
one’s ability or judgment than is measurably justified. For example Most people rate above
average in the host of characteristics, capabilities, traits etc (Dunning, 2005).