# Heuristics

Problem-solving techniques that result in a quick and practical solution

## What are Heuristics?

Heuristics are problem-solving techniques that result in a quick and practical solution. In contrast to business decisions that involve extensive analysis, heuristics are used in situations where a short-term solution is required.

Although heuristics may not result in the most optimal and ideal solution, it allows companies to speed up their decision-making process and achieve an adequate solution for the short term.

In situations where perfect solutions may be improbable, heuristics can be used to achieve imperfect but satisfactory decisions. Heuristics can also include mental shortcuts that help speed up the decision-making process.

### Summary

• Heuristics are problem-solving techniques that result in a quick and practical solution.
• In situations where perfect solutions may be improbable, heuristics can be used to achieve imperfect but satisfactory decisions.
• Most heuristic methods involve using mental shortcuts to make decisions based on prior experiences.

### Understanding Heuristics

When facing complex situations with limited time and resources, heuristics can help companies make quick decisions by using shortcuts and approximated calculations. Most heuristic methods involve using mental shortcuts to make decisions based on prior experiences.

Some of the most common fundamental heuristic methods include trial and error, historical data analysis, guesswork, and the process of elimination. Such methods typically involve easily accessible information that is not specific to the problem but is broadly applicable. It provides an opportunity to make imperfect decisions that can adequately address the problem in the short term.

Depending on the context, there may be several different heuristic methods, which correlate to the scope of the problem. They can include affect, representative, and availability heuristics.

### Types of Heuristics

#### Affect Heuristics

Affect heuristics are based on positive and negative feelings that are associated with a certain stimulus. It typically involves quick, reactionary feelings that are based on prior beliefs. The theory of affect heuristics is that one’s emotional response to a stimulus can affect an individual’s decisions.

When people face little time to reflect and evaluate a situation carefully, they may base their decision on their immediate emotional reactions. Rather than conducting a cost-benefit analysis, affect heuristics focus on eliciting an automatic, reactionary response.

For example, it’s been shown that advertisements can influence consumers’ emotions and therefore affect their purchasing decisions. One of the most common examples is advertisements for products such as fast food. When fast-food companies run ads, they hope to elicit a positive emotional response that encourages you to view their products positively.

If individuals were to analyze the risks and benefits of consuming fast food carefully, they might decide that it is an unhealthy option. However, people rarely take the time to evaluate everything they see and often base their decisions on their automatic, emotional response. Fast-food ads rely on such a type of affect heuristic to generate a positive emotional response, which results in sales.

#### Availability Heuristics

Availability heuristics are judgments people make regarding the likelihood of an event based on information that comes to mind quickly. When people make decisions, they typically rely on prior knowledge of an event. As a result, we tend to overestimate the likelihood of an event occurring simply because it comes to mind quickly. Such mental shortcuts allow us to make decisions quickly, but they can also be inaccurate.

One example of the availability heuristic is stock prices, especially for newly public companies. Many investors tend to invest in new IPOs in the hopes that the stock price will increase significantly in the next few years. Rather than analyzing the company’s fundamentals, the investors remember IPOs that have become tremendously successful, such as Amazon or Apple.

Although it has been shown that most IPOs underperform, investors tend to overestimate the chances of landing a successful IPO based on prior examples that come to mind. It demonstrates a clear example of availability heuristics.

#### Representative Heuristics

Representative heuristics occur when we evaluate the probability of an event based on its similarity to another event. In general, people tend to overestimate the likelihood of an event occurring based on their perceived similarity with another event. When it happens, we tend to ignore the base rate, which is the actual probability of an event occurring, independent of its similarity to other events.

An example of the representative heuristic is product packaging, as consumers tend to associate quality products with their external packaging. If a generic brand packages its products in a way that resembles a well-known, high-quality product, then consumers will associate the generic product as having the same quality as the branded product.

Instead of evaluating the quality of the products, consumers are correlating the quality of the products based on the similarity in packaging.

### More Resources

CFI is the official provider of the global Business Intelligence & Data Analyst (BIDA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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