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Oct
22
2008
Gigerenzer on heuristicsPublished in heuristic, epistemology, decision-making, bounded rationality by Tuomas KuronenThe public lecture super-week at LSE was launched by Gerd Gigerenzer, a German psychologist whose main work concentrates on bounded rationality and heuristic decision-making. His main thesis was the re-evaluation of the unconscious processes taking place in human heads that are commonly seen as, at best, obscuring so called rational ones. The people that think so, let us call them ‘limitationists’, seem to be mainly the same individuals that received the bulk of criticism during the lecture held last Monday. The bottom line is that there can be something happening beyond the realms of language.
Known from Gigerenzer’s and his colleagues’ previous works, information ignoring ‘fast and frugal heuristics’ seem in many cases to outsmart the now suspect ideal of homo economicus. By the way, Markowitz himself didn’t use portfolio theory in allocating his own investments, but used a 1/N heuristic instead. What was new in this presentation, however, was the predictive power of heuristics in some contexts. The audience was shown how – at times – heuristic decision-making gives more accurate predictions. This is rather counter-intuitive.
Consequently, it is suggested that the classical accuracy-frugality –divide doesn’t necessarily hold, which has some serious implications. It means that more is actually less. Not only is arduous computing time-consuming, but it also tells us less of what is going to happen. As Gigerenzer himself put it, “too much information can hurt.” In this case, the poverty of sophisticated mathematical models can be put quite plainly: “fitting easy, prediction hard”. In our times, we witness whole industries being built based on false assumptions of computability and episteme itself. Gigerenzer himself sees gut-feeling-based decision-making being especially prevalent in two cohorts; small children and very highly ranked directors. These two groups of people tend to have the self-esteem for it. Middle-managers, on the other hand, have the need to resort to increase in confidence derived from complex mathematical decision support models. What makes Gigerenzer’s claims strong is the fact that he’s not in the business of searching theoretical elegance a priori, but working with empirical evidence. The search of predictive power in decision-making heuristics is strong enough without assumptions of human Bayesianism. Trackback(0)
Comments (2)
Examples of heuristics in business context --> Decision-making by investors written by Jaakko Aspara, October 23, 2008, 15:35
The use of heuristics by people in business contexts is, indeed, attracting increasing interest among researchers. And GloStra research is not an exception! We have recently focused, e.g., on gut-feeling-based decision-making by investors.
In investment research, there has been rather strong interest in heuristics for already a couple of decades, mostly following the influential work by the Nobel Laureate Daniel Kahneman and his late colleague Amos Tversky. However, most economic psychology and behavioral finance research has so far - unfortunately - tended to adopt the view that the use of heuristics in investment context represents "error(s)" in human decision-making, relative to objectively rational and accurate decision-making. In contrast, GloStra research (along similar lines as Gigerenzer above) has adopted a more positive view of heuristics: we view them as a necessary part of human decision-making and not necessarily representative of errors. Besides referring to heuristics, a recent article of ours (work-in-progress, available on request) points to "aesthetic intuition" in regards to gut-feeling-based investment decision-making. Our claim is that aesthetic intuition operates as a necessary, complementary counterpart to the epistemic-logical analysis of investment opportunities. Specifically, we explain that since the calculations of expected future financial returns (and risks) concerning any investment opportunity are highly complex and inherently uncertain, people are likely to reach their eventual investment decisions always partly based on gut-feeling or intuition, characteristically aesthetic (as opposed to logical or epistemic). That is, one is likely to choose the stock of which one has most positive overall, holistic impression – over other stocks that one expects to have approximately similar expected financial returns/risks. The value of this perspective is that it, drawing on aesthetic philosophy and psychology (e.g., Ramirez 2005; Root-Bernstein 2002), posits aesthetic intuition as a crucial counterpart to the logical and calculative stock analysis in the dynamic situations whereby individuals reach their decisions to invest in particular stocks over relevant others. We also link "aesthetic intuition" to the recent work on "affect heuristic" in investment contexts: "Note that in spanning beyond judgments achievable with mere rational cognizing, the intuition-facilitated judgment may also involve affect – the sources of which may be diverse, also non-financial. Actually, Zajonc (1980), for example, equates overall “affective” responses and judgments with “aesthetic” ones. To elaborate, already the intuitive feeling that the stock of one company might have a slightly better/attractive financial yield profile than the considered, approximately similar others means that one evaluates positively the company/stock, having thus affect for it. Let us call this the financial affect. Yet, one’s financial affect for a company may – beyond one’s consciousness – sometimes be reinforced by one’s non-financial affect for the company. In other words, even if the individual thinks that he/she is making the decision solely based on the expected financial yield profile, his/her non-financial affect for a company may actually produce part of the financial or overall affect towards it and, hence, contribute to the decision to invest in that company’s stock. This is what Slovic et al. have broadly referred to the contribution of the ‘affect heuristic’, a mental short-cut, to investment decisions (Finucane et al., 2000; MacGregor, Slovic, Dreman, & Berry, 2000; Slovic et al., 2002a, 2002b, 2007). Notable examples of potentially intervening non-financial affects for a company might be an affect due to one’s satisfaction with using the company’s products and an affect due to one’s good memories of working with the company." Write comment
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Of course, there is the issue of 'performativity' which may be making rational choice theories increasingly accurate. We can learn to do 'rational choice' calculation just as we can learn to use linear optimization. However, I think it is bad science to insist rat. choice to be a model of how managers behave.
It is interesting to hear Jaakko et al. are working on emotional and aesthetic models of decision making. It is something I've decided to stay out of. Too many things going on in my head and I cannot afford to get carried away with sociology of emotions -- surely an underdeveloped field, isn't it? My own interest has recently been on rationality as reasoning and justification. I tend agree that rationality of actions is best seen as reflexive justifibiality of actions rather than the generative force. This, as many insights, is actually part of the social theory of Giddens. I think this reframing allows one to move away from futile academic debate on rational vs. extra-/irrational action.