Role of Heuristics in Financial Behavior

Heuristics are mental shortcuts or rules of thumb that people use to make decisions quickly and efficiently. In finance, they help individuals simplify complex information, such as investment choices or budgeting. For example, a person might rely on past experiences to gauge the risk of a stock or use simple comparisons to choose between products. While heuristics can speed up decision-making, they can also lead to biases or errors, like overconfidence in forecasts or ignoring critical data. Understanding these heuristics can improve financial decisions by fostering awareness of their potential pitfalls.