Human decision-making is often regarded as a highly rational mental process, but when we take a closer look, we can see that it’s a bit more complicated than that. Making good decisions largely depends on having access to all the relevant information. Still, we live in a complex, information-rich world where gathering and analyzing every detail is both time-consuming and resource-intensive. Every day, our brains are constantly overloaded with information, and it is neither practical nor efficient to process it all. To navigate this challenge, we rely on “mental shortcuts”, known as heuristics, which allow us to make quick yet adequate decisions by focusing on select pieces of information and ignoring the rest.

What does this have to do with my money?

We’ve previously explored how cognitive biases, personal beliefs about oneself and the world, shape financial decision-making. Well, guess what? Heuristics also influence our financial choices. Although these terms are often used interchangeably, heuristics and cognitive biases are not quite the same thing. Cognitive biases reflect tendencies or inclinations that distort our perception of ourselves, others, and the world around us. Heuristics, on the other hand, are strategies that help us filter out and process information quicker, thereby avoiding what is known as information overload. These strategies enable us to filter out irrelevant information and focus on the most important aspects, allowing for faster and more efficient decision-making. They inform us about what information is important and when to stop seeking additional information before making a decision.

While heuristics enable us to make quick and efficient decisions, they often lead to suboptimal outcomes. Using more information to make decisions can lead to better outcomes, but it comes at the cost of time and energy. It’s essential to balance the time you spend making decisions with the desire to make the best one. So, let’s talk about some of the types of heuristics that can affect our financial decision-making, from the simplest to the more complicated.

The Recognition Heuristic

The “I’ve heard of that!” heuristic, or the recognition heuristic, is one of the simplest types of heuristics that we use regularly, especially in the world of finance. We often rely on this strategy with almost everything we buy, from peanut butter to stocks. This mental shortcut helps us navigate our decisions by assuming that things familiar to us have a higher value or are of better quality than things that are less familiar to us.

Surprisingly, familiarity can serve as a good indicator of quality. A group of researchers put this to the test by comparing two types of investment portfolios: one built by professional finance managers, who carefully craft a portfolio based on their expert-level knowledge of the industry, and another one built by simply picking the stocks that people recognize by name—no fancy financial models, no market trend forecasts— just companies that felt familiar. They found that recognizable-stock portfolios were comparable to, and sometimes outperformed, funds managed by experts, but there’s a catch.[1] Over time, these well-known stocks tend to become overvalued, often leading to lower returns in the long run.[2]

So, while the recognition heuristic can be a surprisingly effective shortcut, it’s certainly not a foolproof way to beat Wall Street. As usual, there is no proven way to time the market. Still, it’s pretty remarkable to observe how our brains streamline decision-making in highly effective ways. The best part about this heuristic is that it keeps things simple. Instead of trying to entertain all the factors that go into complex decisions, you can zero in on one factor: familiarity. However, what if you want to focus on something else instead?

The One-Reason Heuristic

Relying on recognition alone might not always be the best way to navigate your financial decision-making, and sometimes it’s best to focus on only one salient reason to guide you, which is known as the one-reason heuristic. Think of it like shopping for a new car; there are many factors to consider, such as price, brand, fuel efficiency, and colour. Instead of analyzing all these, you could pick just one factor that matters most to you, like fuel efficiency, and choose the car with the best mileage, regardless of any other factor. Studies have shown that investors tend to use this heuristic, selecting stocks that have recently performed well and/or received media attention.[3][4]

Like the recognition heuristic, the one-reason heuristic can often lead to pretty good financial choices (as long as your reason is good). However, the market is complex, and like most heuristics, becoming overly reliant on these mental shortcuts can leave you blind to other important factors that should be taken into account. So, if choosing one reason isn’t always enough, why not consider multiple factors in our financial decision-making?

Imagine you want to create a diverse investment portfolio to maximize risk and return. You could spend hours, days, or even years researching every possible stock and developing a method to analyze a mind-numbing number of factors. The problem is that this would not only be incredibly time-consuming and resource-intensive, but the complexity and unpredictability of the stock market make it near impossible to guarantee success, unless perhaps you’re Warren Buffett or Jim Simons.

When people try to create the “perfect” portfolio, they often end up over-trading and constantly buying and selling to optimize their strategies, which not only loses money due to excessive transaction fees and investment mistakes, but it has also been shown to reduce investor self-esteem and optimism.[5] An investment portfolio is like a bar of soap; the more you handle it, the smaller it gets! Losing money can leave people feeling overwhelmed by the complexity of investing, causing them to avoid investing altogether. Don’t fear, there is a better way to invest!

So, if focusing on a single factor (like recognition or “one good reason”) is too simplistic, but analyzing every possible factor is too complex, how do we strike a balance between practicality and optimality? Let’s get into it!

The Satisficing Heuristic

The final stop on our tour of mental shortcuts is the satisficing heuristic. It’s a weird word, but a handy tool, especially when life throws too many options into the mix. The term “satisfice” is a combination of the words satisfy and suffice, and it refers to when people strive for a solution that is just good enough rather than try to arrive at the best possible solution. The strategy involves identifying the criteria most important to you and then choosing the first option that meets them. Let’s return to our example of purchasing a car. You don’t need the best car ever to exist (or maybe you do, I won’t judge), you just need one that fits your budget, gets good mileage, and won’t leave you broken down on the side of the highway. When you find a car that checks all these boxes, you buy it. Decision made. No need for endless comparisons, no agonizing over tiny differences, and no down a rabbit hole of “best car 2025” reviews. When you find a car that fulfills the set list of specifications that you think are most important, your search ends.

Satisficing works for investors, too. Rather than wasting time trying to build the “perfect” portfolio, satisficing investors will set a specific, achievable target (e.g., “I want to have $50,000 for a down payment on a house in five years”) and pick the portfolio that is most likely to meet or exceed it. It may not necessarily maximize returns, but it simplifies decision-making and often leads to more satisfying outcomes. Would you rather reach your goals or risk your savings chasing the slim chance of outperforming the market? Since the inception of satisficing by Nobel Laureate Herbert A. Simon in 1956, abundant research has demonstrated the benefits of satisficing as an incredibly effective way to navigate complex decisions.[6] Sometimes “good enough” is all we need.

That was lengthy, so let’s recap: we’ve explored how heuristics help balance efficiency and optimization when making decisions. These mental shortcuts simplify the problem by focusing on a subset of available information, but be careful not to oversimplify the problem, as it may lead you astray. The recognition heuristic and the one-reason heuristic are great methods for making quick and effective decisions, but these strategies are not one-size-fits-all. They run the risk of oversimplification and can produce undesirable outcomes for more complex decisions that require more time and attention. If you want to make good enough decisions in a reasonable amount of time, without expending all your energy, the data suggests that satisficing is your best bet. The satisficing heuristic teaches us that when it comes to life, the happiest people aren’t always those who maximize everything, but those who know when good is good enough.