What is the availability heuristic and the availability heuristic bias? How does it affect decisions?
The availability heuristic is the desire to compare an unknown to something known. This can create the availability bias where it skews thinking.
Read on to understand the availability heuristic and the availability bias.
The Availability Heuristic
The availability heuristic finds human beings answering questions and making judgments on the basis of whether comparable examples come readily to mind. When it comes to the availability heuristic, we are biased against statistical probabilities (Reflective Thinking) and toward the most vivid examples (Automatic Thinking).
The availability heuristic bias is especially active in assessments of risk. For example, people who have experienced a natural disaster themselves are more likely to overestimate disasters’ frequency; and research shows that flood and earthquake insurance purchases jump in the immediate aftermath of these events and taper off as people’s memories fade. This is because of the availability bias. Similarly, because nuclear meltdowns receive sensational coverage in the news, people tend to be more concerned about nuclear power plants than about heart health, even though heart disease kills over 10,000 times more people than nuclear accidents.
Information Availability and Mortgages
One way to reduce the availability heuristic bias impacting contemporary mortgages is to implement one of two versions of the RECAP (Record, Evaluate, and Compare Alternative Prices) system. In the simplest version, lenders would have to report the costs of the loan in two categories: fees and interest. In the slightly more complex version, the fees could be itemized, but they would have to add up to a single number (which could then be used to compare various mortgages across lenders).
The interest category in the RECAP system would include greater detail than is customary now. For example, the report would feature a schedule of payments over the lifetime of the loan so borrowers know exactly what they’ll be paying when.
Lenders would also be required to supply borrowers with machine-readable versions of their reports, with all fees and rates included. Thaler and Sunstein predict that with the standardization of these reports, third-party firms will appear that can analyze these reports and compare them. They also predict the RECAP system will make shopping for mortgages online easier, a key feature for women and African-American borrowers: A study of automobile shoppers found that buyers from these two social groups paid less online than they did when they went to a dealership.
(A RECAP system for mortgages, if it had been implemented at the time, might have reduced the effects of the 2008 financial crisis. Both borrowers and lenders would have had more information about the contractual obligations they were agreeing to, and the risks of subprime loans would have been more apparent.)
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