Economics, 3rd Edition

People Have a Natural Tendency to Look for Examples Which Confirm Their 

Existing View or Hypothesis

Nassim Nicholas Taleb, author of the book The Black Swan, calls this ‘naïve empiricism’. People identify, 

select or observe past instances and quote them as evidence for a viewpoint or hypothesis. For example, 

every extreme weather event that is reported is selected as evidence of climate change, or a rise in the 

price of petrol of 10 per cent is symptomatic of a broader increase in prices of all goods.

People Use Rules of Thumb – Heuristics

The standard economic model implies that to act rationally buyers will consider all available information in 

making purchasing decisions and weigh up this information to arrive at a decision which maximizes utility 

subject to the budget constraint. In reality it is likely that many consumers will:

a. 

not have access to sufficient information to be able to make a fully rational choice; and

b. 

even if they did they would not be able to process this information fully partly due to a lack of mental 

facility (not everyone can do arithmetic quickly in their head nor make statistical calculations on which to 

base their choices). Instead when making decisions many people will use short cuts that help simplify the 

decision-making process. These short cuts are referred to as 

heuristics

 or rules of thumb. Some of these 

heuristics can be deep-seated and firms can take advantage of them to influence consumer behaviour.

heuristics 

short cuts or rules of thumb that people use in decision making

There are a number of different types of heuristics.

Anchoring 

This refers to the tendency for people to start with something they are familiar with or know 

and make decisions or adjustments based on this anchor. For example, a consumer may base the price they 

expect to pay for a restaurant meal on the last two prices they paid when eating out. If the price at the next 

restaurant is higher than this anchor price it may be that the consumer thinks the restaurant is ‘expensive’ 

or ‘not good value for money’ and may choose not to go again, whereas if the price they pay is lower than 

the anchor price they might see the restaurant as being good value for money and choose to return again. 

Often these anchors are biased and so the adjustment or decision is flawed in some way.

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128  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK