Affect Heuristic – Gut feel decisions


Affect Heuristic – Gut feel decisions
The affect heuristic is a heuristic, a mental shortcut that allows people to make decisions and solve problems quickly and efficiently, in which current emotion—fear, pleasure, surprise, etc.—influences decisions. In other words, it is a type of heuristic in which emotional response, or “affect” in psychological terms, plays a lead role. It is a subconscious process that shortens the decision-making process and allows people to function without having to complete an extensive search for information. If their feelings towards an activity are positive, then people are more likely to judge the risks as low and the benefits high. On the other hand, if their feelings towards an activity are negative, they are more likely perceive the risks as high and benefits low.
http://en.wikipedia.org/wiki/Affect_heuristic

Basically, it is human tendency to look at the world through the lens of whatever our mood was at that time.
A mental shortcut which helps us to make decisions quickly based on pure emotions rather than logic.
It is an immediate response effect which speeds up the processing time.
Researchers have found that if we have good feelings about something, we see the benefits high and risk as low and vice versa. It is how our mind takes a difficult question and subconsciously substitutes it for an easier one.

Affect Heuristic examples
1.    If someone has overtaken you on road, the emotion that drives you to immediately pick up speed and over take him, without thinking of the risks
2.    If you come across a news in the media about a company, you may immediately make decisions regarding its financial instruments – like stocks, bonds etc., whether to buy or sell them
3.    Similarly hearing some news about someone makes us to jump into conclusions about them or their character without analysing or finding facts
4.    Immediately associating names with positivity or negativity – When we hear about names like Dettol, Horlicks, etc., we associate them with health.

Overcoming Affect Heuristic
1.    It takes practice to start thinking rationally rather than emotionally before making decisions
2.    Before making decisions make sure you have analysed properly, and decisions are taken only based on facts and figures

My experience with Affect Heuristic
During my early days, I used to just go with brand names like Tata, HDFC etc., and had invested in their companies – few of them gave good returns, and few did not. Then, I realized that I have been associating these brand names for their superior and transparent management.

Advertisements

Leave a comment

Filed under Behavioural Finance

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s