Heuristic Estimating

Definition:
Heuristic estimating, also referred to as rule of thumb, is a decision-making process in finance mainly based on learned patterns or techniques. It's a simplification technique basically used to quickly perform estimation when the complete data is uncertain or complicated.

Importance:
Heuristic estimating is essential because it decreases the complexity of decision making, enhances estimation accuracy and accelerates the decision making process, particularly in financial markets. It uses intuitive judgement based on experience, learning, and understanding of financial patterns.

How it works:
Heuristic estimating typically works by deriving estimates through previously experienced patterns. Investors and finance professionals might use for example an average 10% annual estimate return for an investment based on previous patterns. This method, though not always entirely accurate, can give a quick approximation.

Exam Tips: Answering Questions on Heuristic Estimating

• When asked about heuristics, first define what it is.
• Explain importance of heuristic estimation, particularly in finance.
• Answer how heuristic estimation works and give an example of it.
• Stay clear and concise, avoid unnecessary details.