Heuristics
Also called: Rules of thumb · Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
Heuristics are mental shortcuts, or rules of thumb, that people use to make quick decisions without full calculation. They save time and effort and often work well. But they also cause systematic biases, which are errors in the same direction again and again (Kahneman-Tversky, 1974). This challenges the idea of homo economicus, the perfectly rational decision-maker of standard economics.
Example
Anchoring is one heuristic. A shopper sees a tag saying "was ₹999, now ₹499" and feels they got a bargain, because the first number seen (₹999) sets the reference, whatever the product is actually worth. The availability heuristic, judging risk by how easily examples come to mind, is another.
Don't confuse with
- Bias: a heuristic is the shortcut itself. A bias is the systematic error the shortcut can produce.
Related concepts
- Behavioural economics
- Bounded rationality
- Satisficing
- Anchoring
- Availability heuristic
- Confirmation bias
- Overconfidence bias
- Prospect theory
- Loss aversion
- Endowment effect