Heuristics are Tools for Uncertainty

Abstract

Heuristics are commonly viewed in behavioral economics as inferior strategies resulting from agents' cognitive limitations. Uncertainty is generally reduced to a form of risk, quantifiable in some probabilistic format. We challenge both con-ceptualizations and connect heuristics and uncertainty in a functional way: When uncertainty does not lend itself to risk calculations, heuristics can fare better than complex, optimization-based strategies if they satisfy the criteria for being ecological rational. This insight emerges from merging Knightian uncertainty with the study of fast-and-frugal heuristics. For many decision theorists, uncertainty is an undesirable characteristic of a situation, yet in the world of business it is considered a necessary condition for profit. In this article, we argue for complementing the study of decision making under risk using probability theory with a systematic study of decision making under uncertainty using formal models of heuristics. In doing so, we can better understand decision making in the real world and why and when simple heuristics are successful.