Heuristics in Business and Economics

According to Gigerenzer and Gaissmaier (2011), “Heuristics, are efficient cognitive processes, conscious or unconscious, that ignore part of the information”. In this view, heuristics are simple rules of thumb that can be... [ view full abstract ]

According to Gigerenzer and Gaissmaier (2011), “Heuristics, are efficient cognitive processes, conscious or unconscious, that ignore part of the information”. In this view, heuristics are simple rules of thumb that can be successfully used in situations of irreducible uncertainty and complexity. The more dominant view of heuristics, heuristics and biases, studies instances where people make less than rational or biased judgments, and attaches these instances often to the use of heuristics. In their initial research, Tversky and Kahneman (1974) argued that three heuristics, namely availability, representativeness, and anchoring and adjustment can be used to explain the processes underlying a wide range of intuitive and often fallible judgments.

Interestingly, social scientists are not the only group, or the first group, who use and study heuristics. Engineers, computer scientists, and mathematicians, as well as theoreticians in many scientific fields have been using heuristics, simple rules, and rules of thumb extensively as strategies for problem solving. Gathering the ways in which different fields define heuristics and spelling out the similarities and differences between these definitions is a theme of this paper.

The other, more specific goal is to survey the different conceptions of heuristics stemming from different psychological approaches to human decision-making processes. The paper demonstrates which concepts have or have not been extended to economics and other business disciplines. It specifies instances where the study of adaptation, use of heuristic strategies, and less-than-rational behavior is modeled in behavioral economics. It argues that in cases where the predominant conception of heuristics has been adopted in behavioral economics, the implications for understanding and describing decision processes can be traced back to the traditional neoclassical economic theory of rational decision-making.

Finally, it illustrates the ways in which the less explored extension of simple heuristic strategies to economic behavior holds operational promises, which can shed light on our understanding of puzzling behavior in economic markets. Examples from the prevalent use of simple rules in entrepreneurial domain provide a fruitful area for turning the focus of the study of heuristics from being a source for biased judgment to a functional way of treating the actual problem at hand.