Question

Most decision problems in economics involve the selecting the best product or bundle of products. Often, these products are comprised of many distinct attributes that are not easily comparable. As a result, consumers often use heuristics that condition decisions on a subset of these attributes in order to make choices more quickly or at a lower psychic cost. For each of the heuristics listed below give a brief description, identify a situation where it is likely to be employed, and hypothesize a potential bias that could result from employing this rule of thumb in that situation.

(a) The ”hot hand”

(b) Availability

(c) Anchoring & Adjustment

(d) Representativeness

(e) Affect

Answer 1

Hot Hand -the notion that if a person has a string of successes at a random event, he or she is like to have more continued success in that random event.This concept can be used in gambling and also some athletic sports The same concept is nowadays applied to investors. If a fund manager is successful in the last three or four attempts, he may have a “hot hand” and investors who want to invest may prefer such fund managers who have “hot hand”. this concept is very important in financial investing terms. AVAILABILITY- It is the aggregate of the resource's accessibility, reliability, maintainability, serviceability, and securability.For example:availability of the resource in the region was unlike any other location so we decided to build our warehouse there. Anchoring and Adjustment- The anchoring and adjustment heuristic describes cases in which a person uses a specific target number or value as a starting point, known as an anchor, and subsequently adjusts that information until an acceptable value is reached over time. Representative -agent to refer to the typical decision-maker of a certain type for example, the typical consumer, or the typical firm. More technically, an economic model is said to have a representative agent if all agents of the same type are identical. . Affect-When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected. Rising prices, known as inflation, impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and every other facet of the economy.