https://sites.google.com/site/matteorichiardi/teaching/complexity-economics

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Matteo Richiardi

Complexity Economics

University of Turin

February-April 2024

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Lecture 6:�Heuristics

Matteo Richiardi

Complexity Economics

University of Turin

February-April 2024

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Sources:

• Bookstaber, ch. 7
• Miller & Page, ch. 8, 9

Borges’ library of Babel

• Each book contains 410 pages, each page 40 lines, �each line 80 characters, for a total of 1,312,000 characters.
• There are 25 characters: 22 letters, empty space, period, comma.
• The library contains a book with every possible combination of those characters.
• Any history, including a detailed history of the future, any description of a place or person, philosophical discussion, or religious canon exists somewhere in the library.
• The library contains all knowledge, indeed all possible knowledge.

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In the library of Babel...

• ... Can we eliminate radical uncertainty?
• No, the books cannot be indexed, the knowledge is unaccessible (moreover, the books will contain more space than the entire universe, even if they were to be miniaturised).

🡪 Role of heuristics.

Euristics, evolution, learning

• A heuristic is a strategy that ignores some information and generates simple rules of thumb.
• Speed vs. accuracy
• Resilience
• Ecological rationality

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Heuristics and biases /1

Availability Heuristic:

• Example: If people frequently hear about shark attacks in the news, they might overestimate the actual likelihood of encountering a shark while swimming.

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Representativeness Heuristic:

• Example: Assuming someone who wears glasses, reads a lot, and likes science is more likely to be a librarian than a truck driver, based on stereotypical characteristics.

Heuristics and biases /2

Anchoring and Adjustment Heuristic:

• Example: When estimating the price of an item, people may anchor their judgment based on an initial piece of information, like the first price they see, and then adjust from there.

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Confirmation Bias:

• Example: Seeking out information that confirms preexisting beliefs and ignoring evidence that contradicts those beliefs.

Heuristics and biases /3

Hindsight Bias:

• Example: After an event has occurred, people may believe they "knew it all along" and overestimate their ability to predict the outcome.

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Availability Cascades:

• Example: Believing something is true because it is widely accepted or frequently repeated, even if the information is not necessarily accurate.

Heuristics and biases /4

Substitution Heuristic:

• Example: When faced with a complex decision, people might substitute an easier question for the actual complex one and answer the simpler question instead.

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Scarcity Heuristic:

• Example: Assigning higher value to things that are perceived as rare or in limited supply, even if their actual usefulness may not justify the value.

Heuristics and biases /5

Substitution Heuristic:

• Example: When faced with a complex decision, people might substitute an easier question for the actual complex one and answer the simpler question instead.

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Scarcity Heuristic:

• Example: Assigning higher value to things that are perceived as rare or in limited supply, even if their actual usefulness may not justify the value.

Attention bias

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The (I’ll tell you later) Illusion

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The tendency to prioritize the processing of certain types of stimuli over others:

The Door Study