People use heuristics
to control extreme complexity. Heuristics are rules or strategies for
information processing, which help to find a quick but not necessarily
optimal decision. Heuristics are used when people are overwhelmed by information
processing, and help to find a quick, but not necessarily optimal, solution.
THE FACTS: although this helps to
simplify decision- making situations, ignoring small differences adds
the risk of arriving at non-rational conclusions.
IGNORING POSSIBLE RELATIONSHIPS BETWEEN
COMMITMENTS AND PROJECTS: ignoring risk interrelationships
may result in risk assessed wrongly.
AVAILABILITY OF INFORMATION:
there is always the risk of receiving important information late or perhaps
not at all. People always respond emotionally, or in an exaggerated fashion,
to highly visible recent information, e. g. surprising news. Investors
on the stock exchange market tend toward a positive price prediction when
in a good mood following some gain, and they see the current market situation
in a pessimistic light when they are in a bad mood following a run of
+ People tend to ignore
information not only consciously, but also subconsciously, when it "does
not suit them or when they expect to receive completely different information.
+ Information which is presented
against a contrasting background is often perceived disproportionately.
+ Information which is mentioned
last stays uppermost in the mind and therefore is considered most frequently.
When the information
is reduced to a manageable level, there comes the necessity to resolve
the decision problem as quickly as possible. People tend to base their
estimations on a first source of reference value (anchor) and subsequently
to adjust their decisions as they receive more information. Empirical
research, however, shows that this is often not the case. The adjustment
process is regularly cut short and the original value (anchor) is given
too much weight.
People also tend to
confuse cause and effect, to overestimate empirical and causal relationships.
Imagine there are two analysts who daily issue forecasts on the development
of the dollar price and Analyst 1 issues two correct forecasts in two
consecutive days. Analyst 2 issues two wrong predictions. A client will
assume that Analyst 1 offers correct forecasts and Analyst 2 offers wrong
forecasts. Thus, an empirical relationship is turned into a causal one.