What is the Availability Heuristic and how does it impacts your business?

You have 5 seconds to think of your favorite memory with your pet…. Got it? Now, is this particular memory really your favorite memory with your pet? Or is it the memory that was easy to recall?

Now, if the memory you recalled falls in the first category, it is okay. However, if your response falls in the second category, you are a victim of the availability heuristic. It is a mental shortcut that explains why it is easy for us to recall prevalent thoughts quickly.

Now, if, on the other hand, you were given more time to think about all the memories that you had with your pet, you will realize that your favorite memory isn’t actually the one that came to mind in the first place.

However, the majority will state that their favorite memory is what they remember easily as it is what our brains prefer.

Index:

What is Availability heuristic bias?

Daniel Kahneman and Amos Tversky started examining human judgment under uncertainty in the 1960s and 1970s. Prior to this, the predominant view was, humans were rational actors when it came to making judgments.

However, the two discovered that human judgment under uncertainty was based on limited simplifying mechanisms rather than an extensive cognitive process.

One such simplifying mechanism that humans employ is making a decision on how many similar instances come to their minds. Daniel Kahneman and Amos Tversky labeled this phenomenon as an availability heuristic.

Availability Heuristic example — Availability Heuristic

The availability heuristic is where people make decisions or judgments about the likelihood of an event on how easily an example or instance comes to their mind.

An excellent example of this would be when an investor judges the quality of an investment based on information in the news and completely ignores other relevant facts.

The availability heuristic is a mental shortcut based on an immediate example that comes to a person’s mind when faced with a specific event, concept, thing, or decision. We tend to use available facts and instances to base our views on any idea. We also assume that future events are likely to resemble our past experiences.

Availability heuristic tends to attribute more weightage to information that readily comes to our minds than the most useful and accurate information. It further suggests that if something is more easily recalled, it must occur with a higher probability. This bias can have various negative impacts.

Why does it happen?

Humans are considered misers when it comes to using all their cognitive abilities to make a well-informed decision. Additionally, our brain has also evolved ways to reach quick decisions based on shortcuts. While it is great to have shortcuts in making decisions, this may not always be true as it can lead to inaccurate and wrong decisions.

As far as availability heuristic is concerned, it happens because our brain uses a mental shortcut and draws upon the information that is most easily accessible to our mind. It could be something that you have heard or read recently or something memorable as such.

For example, if you have recently heard the news of a plane crash, you are likely to overrate your chances of being involved in a crash as it is on top of your mind. It exists because some memories and facts can be quickly retrieved due to their frequency or that they have a lasting impact.

In comparison, some others take effort and time to be recalled. This is availability heuristic bias.

Example of the availability heuristic:

How often do business owners and managers use the words ‘that’s what we did last year’? The answer is many times. These words are frequently heard in businesses and are a clear example of an availability heuristic in action. The logic is pretty simple: what a person or business did last year is clearer and more memorable than something they haven’t done.

For example, businesses often stick to the same marketing and promotion strategies as it is something they have done in the past. So why change the same system for something they have no idea about? However, businesses must realize that what has worked in the past may not always work in the future. Moreover, a change may offer better results.

The effect of availability heuristic on business:

Bad decision making:

The availability heuristic is a leading cause of bad decision-making since easily recallable memories, not necessarily sufficient in figuring out the turn of events, outcomes, and the likelihood of a particular thing happening.

Ultimately reliance on memories will lead to bad decision-making as a person will be making decisions based on low-grade and inaccurate information.

Wrong prioritization:

when you are basing your choices and decisions on a memory that appears first in your mind, you are likely reading and analyzing the situation in the wrong way and are likely to take the wrong course of action. During this process, you may prioritize things that are not likely to happen or may not lead to a good result.

For example, you may prioritize investing in a particular machine/ shares based on a news piece or word of mouth, but such a machine/ investment may not benefit you.

On the other hand, you could have used the same resources in something that you needed for your business or invested in shares that were more likely to be beneficial.

Sunk cost fallacy:

You are likely to be a victim of Sunk cost fallacy, as you may continue to invest in a business/ venture despite its uncertain outcomes or likelihood of a loss. You will be doing so as you have been doing it in the past, and it may be easily recalled when thinking of investments.

How to avoid it?

The availability heuristic has serious consequences that may affect various aspects of one’s life and work. People make several decisions every day, and multiple factors like news, media coverage, reactions, and vivid images greatly influence their rationality.

Therefore to save ourselves from being a victim of our intrinsic biases, we must be aware of its existence. And even though our brain tends to minimize efforts to complete routine tasks, we must ensure that all the decision we take is based on rational thinking and accurate analysis of the circumstances, the problem at hand, and available options.

Although awareness alone cannot change the thought process, it is essential to implement steps and policies taking the heuristic into account.

A great way of doing this can be by having discussions with your team before making any decision or hiring professional analysts to help you understand the intricacies of situations and make a sound decision.

Final words:

Some memories have a lasting impact on us because they are related either to an emotional trigger or seem familiar as they align with how we process things.

But these memories may not have a rational foundation. So even though our brain may lead us to make quick decisions based on our memories, understand that no successful business or investment made based on irrational decisions or beliefs has survived in the long run.

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What is Availability Heuristic?