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# Decision-making II judging the likelihood of events PowerPoint PPT Presentation

Decision-making II judging the likelihood of events. Heuristics and Biases. Tversky & Kahneman propose that people often do not follow rules of probability Instead, decision making may be based on heuristics Lower cognitive load but may lead to systematic errors and biases

Decision-making II judging the likelihood of events

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## Decision-making IIjudging the likelihood of events

### Heuristics and Biases

• Tversky & Kahneman propose that people often do not follow rules of probability

• Instead, decision making may be based on heuristics

• Lower cognitive load but may lead to systematic errors and biases

• Example heuristics

• representativeness

• availability

Tom Cruise

Celia Weston

Tom Hanks

Frances O’Connor

Mel Gibson

Illeana Douglass

Jim Carrey

Marg Helgenberger

George Clooney

Debi Mazar

Alyson Hannigan

Russell Crowe

Harrison Ford

Bruce Willis

Lindsay Crouse

Molly Parker

### Availability Heuristic

• Definition

“A person is said to employ the availability heuristic whenever he estimates frequency or probability by the ease with which instances or associations could be brought to mind”

### Availability Heuristic

• Are there more words in the English language that begin with the letter V or that have V as their third letter?

• What about the letter R, K, L, and N?

(Tversky & Kahneman, 1973)

Which causes more deaths in developed countries?

1.(a) traffic accidents

(b) stomach cancer

2. (a) homicide(b) suicide

(Kahneman & Tversky, 1974)

### Results

• Typical Guess

traffic accident = 4X stomach cancer

• Actual

45,000 traffic, 95,000 stomach cancer deaths in US

• Ratio of newspaper reports on each subject

137 (traffic fatality) to 1 (stomach cancer death)

(Kahneman & Tversky, 1974)

(Lichtenstein et al., 1978)

### Why use the availability heuristic?

• Availability is based on fundamental aspect of memory search

• Works well under many circumstances

• Availability correlates with likelihood of events

All the families having exactly six children in a particular city were surveyed. In 72 of the families, the exact order of the births of boys and girls was:

G B G B B G

What is your estimate of the number of families surveyed in which the exact order of births was:

B G B B B B

Answer: a) < 72 b) 72 c) >72

A coin is flipped. What is a more likely sequence?

A) H T H T T H

B) H H H H H H

A) #H = 3 and #T = 3 (in some order)

B) #H = 6

Gambler’s fallacy: wins are perceived to be more likely after a string of losses

### Representativeness Heuristic

• Probability of an event or sample of events is judged by its similarity to the population from which sample is drawn.

• The sequence “H T H T T H” is seen as more representative of or similar to a prototypical coin sequence

### Hot Hand Belief in Basketball

• Question:

• Does a player have a better chance of making a shot after having just made his last two or three shots than he does after having just missed his last two or three shots?

• Yes = 91%

• No = 9%

(Gilovich, Vallone, & Tversky, 1985)

### Does the “hot hand” phenomenon exist?

• Most basketball coaches/players/fans refer to players having a “Hot hand” or being in a “Hot zone” and show “Streaky shooting”

• However, making a shot after just making three shots is as likely as after just missing three shots

 not much statistical evidence that basketball players switch between a state of “hot hand” and “cold hand”

(Gilovich, Vallone, & Tversky, 1985)

• “Who is this guy? So he makes a study. I couldn’t care less.” (Celtics owner)

• “There are so many variables involved in shooting the basketball that a paper like this really doesn’t mean anything.” (Bob Knight; Hoosiers coach)

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Rate the likelihood that the following statements about Linda are true:

a) Linda is active in the feminist movement

b) Linda is a bank teller

c) Linda is a bank teller and is active in the feminist movement

Rating C as more likely than B and A is a Conjunction Fallacy

### What to make of these results?

• One interpretation of Tversky & Kahneman’s findings:

• people do not use proper probabilistic reasoning

• people use arbitrary mechanisms/ heuristics with no apparent rationale

• However, Gigerenzer and Todd show in their “Fast and Frugal Heuristics” research program that heuristics can often be very effective

### Which city has a larger population?

• Kansas City (KS)

• Junction City (KS)

### Which city has a larger population?

A) San Diego

B) San Antonio

• 66% accuracy with University of Chicago undergraduates. However, 100% accuracy with German students.

• San Diego was recognized as American cities by 78% of German students. San Antonio: 4%

 With lack of information, use recognition heuristic

(Goldstein & Gigerenzer, 2002)

### How to pick a stock

Problem: what stocks to invest in?

Solution 1—“optimizing”:

• Gather lots of info about many companies

• Process with sophisticated tools and choose

Solution 2—the recognition heuristic:

• Purchase stocks from recognized companies

(slide from Peter Todd)

“Paying for the name…….”

(slide from Peter Todd)

### Picking Stocks with Recognition Heuristic

Note: this result has not replicated in other studies (e.g., Boyd, 2001; Rakow, 2002) -- don’t rush to use this heuristic on your own money!