Heuristic behavior, bias, and anchoring and adjustment

Because of the limited amount of storage and processing capacity in short-term memory, humans develop simplifying cognitive shortcuts or production rules to solve complex problems. These simplifying production rules are com­monly known as cognitive heuristics or simply, heuristics. Although heuristic behavior is an efficient means of information processing, these mental short cuts can lead to systematic errors.  Systematic errors are errors that people make on a regular basis due to the limitations of human information processing.  Common mistakes in human information processing may result in judgmental bias, or simply ‘bias.’  Unsystematic (random) errors or mistakes may still exist, but it is important to emphasize that only systematic errors result in bias.

Recognizing the importance of Simon’s limitations on human information processing, Daniel Kahneman and Amos Tversky were interested in the effects of these limitations on human decision-making.  See Box 2 below for more information on Nobel Prize recipient Daniel Kahneman.  Through a series of relatively simple experiments, mainly with college students, Kahneman and Tversky discovered several types of cognitive heuristics that humans tend, more often than not, to use in problem solving. 

It is important to emphasize that the limitations on human information problem solving identified by Simon and Newell and the findings of Kahneman and Tversky apply to all humans and not just to real estate decision-makers in particular.  Heuristic behaviors have been documented in the problem solving strategies of a wide variety of problem solvers from gamblers to medical doctors.

Through the Kahneman and Tversky experiments, many varieties of heuristic behaviors in human decision-making have been identified.  A few of the initial heuristics discovered included representativeness, availability, and anchoring and adjustment.  In addition to these initial heuristic behaviors, others have been identified such as over-confidence, over-reaction, and sentiment.  Although humans employ many heuristics behaviors, the anchoring and adjustment heuristic has been ever-present in many problem-solving situations and we will concentrate on this heuristic rather than try to cover all heuristics types in one post.  

Generally, humans employ the anchoring and adjustment heuristic when faced with ill-defined problems requiring a numerical judgment.  With this type of problem, most people will use a strategy of starting from an initial value, called the anchor, and make adjustments from this initial reference point to arrive at final judgments. The systematic error occurs because we typically make insufficient adjustments to the anchor resulting in judgmental biases.