Some thoughts on heuristics

Amos Tversky was an Israeli cognitive and mathematical psychologist, his work showed that people do not behave according to rationality and logic. Instead, we have a number of heuristics and cognitive biases that influence our decision making, especially in uncertain situations.

In his paper with Daniel Kahneman titled Judgement under Uncertainty: Heuristics and Biases they describe three key heuristics that people often use:

Representativeness: This is when people judge the probability of an event by how much the event resembles typical examples of the event. This can lead to errors when the resemblance does not accurately reflect the actual probability.

Availability: People assess the frequency or likelihood of an event by how easily examples of the event come to mind. This can be biased by recent or vivid events, making them seem more common than they are.

Adjustment and Anchoring: When estimating numbers, people often start with an initial value (anchor) and then adjust from there. These adjustments are typically insufficient, leading to biased estimates close to the anchor.

Dan Ariely (a little bit unpopular at the moment) talks about anchoring in his book Predictably Irrational, he tells the story of Salvador Asael ‘The Pearl King’, who brought black pearls to America in the 70’s. At first despite all his marketing efforts he failed to sell a single pearl, however rather than lower the price, he got them put in the window of a store on Fifth Avenue with an outrageously high price. Soon they were parading around Manhattan on the necks of some of the most wealthy people in New York. 

Whenever I hear the word ‘heuristics’, I think of poker…

Many years ago I played poker for a living. If you want to get good at poker it requires countless hours of study, running your play through solvers to understand the game theory optimal play and trying to develop heuristics based on the outputs. The problem is we don’t think like computers, computers don’t think ‘when I get this hand in this situation I will fold.’ They’re simply solving for the optimal play by finding the equilibrium between each opponent's strategy. It’s very easy to develop a heuristic that works in some cases but not in others. I suppose this is what Tversky and Kahneman call Representativeness.

You also find situations where people develop heuristics based on, well, it’s hard to tell what. Which always reminds me of the Jenga scene in The Big Short.

Dave Snowden says If you don’t understand why something works, you can’t scale what you did last time. On the other hand, some things are inherently unknowable. Which is why, as Snowden says, we need to build chefs, not recipe book users. I suppose in some ways this blog is about my journey to becoming a chef, someone who can solve problems in any situation I find myself in, with whatever happens to be in the metaphorical kitchen. My wife will tell you I’m a long way from becoming a chef, I suppose I have representativeness to thank for that too. You’ve gotta put in the work.