Lecture 1 - Heuristics and Biases Flashcards
How do we make a rational decision?
- Define the problem
- Identify all decision criteria
- Allocate weights to criteria
- Identify all alternatives
- Evaluate the alternatives
- Choose the best alternative
What are concepts (beyond rational choice) that people use to make decisions?
1) Bounded rationality (Simon) - limited resources (time and cognitive resources) - we do not choose the best options for us because of not having enough resources (we ‘sacrifice’) - satisfactory decision among few alternatives
2) ‘‘Predictable’’ irrationality - systematically wrong decisions (non-optimal) - (Tversky and Kahneman)
What is the more important model to understand how people make decisions?
System I and System II - Bat and ball example
System I - ‘‘Intuitive answer’’ - fast, automatic, not cognitively demanding
System II- ‘‘rational answer’’ - slow, controlled, cognitively demanding
Idea: System II questions the validity of System I choices and comes up with a rational answer.
What are systems I and system II responsible for?
System I - responsible for heuristics (mental shortcuts to satisfactory(tend to be correct) solutions) - efficient, work most of the time;
However, when system I does not work, it leads to biases - systematic deviations from ‘rationality’ , these biases are systematic and predictable;
NOTE: not all biases and heuristics are due to System I (they can occur in System II as well) ;
Where can we apply probability estimation/judgment?
Buying an apartment (price changes in years), starting to feel ill and go on a vacation, when we buy products, visit new places etc.
What concepts do we often use when we make probability estimations?
Representativeness Heuristic - mental shortcuts to make judgements in an efficient way ; when we estimate that x belongs to y => the more x resembles y, the more likely is that x to be y;
Availability Heuristic - the instant recalling of certain information influences our choice
What are the issues with the representativeness heuristic?
- How confident are we in the resemblance (of x to be y)?
A) Stereotypes (female CEO - parent role - calling to wish ‘‘Good luck, son’’ while the father is in the car - accurate stereotypes are still stereotypes, but they can still be misleading.
B) Insensitive to sample size - small sample = less likely to represent reality; bigger sample = more likely to represent reality - How likely is Y in the first place?
C) Conjunction fallacy - Likelihood of x being y also depends on the probability of y being y itself in the first place.
People ignore base rates (id
Bank teller - Feminist bank tells - Feminists - It feels like
Representativeness ignores base rates.
D) False positive percentage - it increases the overall likelihood of having a false positive result.
Explain conjunction fallacy
Based on this description, subjects are asked which of the following statements is more probable.
(1) Linda is a bank teller.
(2) Linda is a bank teller and a feminist.
Statement (2) is the intuitive response for many people (more than 80% of participants in the original formulation of the problem), who tend to associate Linda with feminism. However, we must note that (1) is more probable than (2), because, once again, statement (1) must be true in order for statement (2) to be true. To choose statement (2) is to commit the conjunction fallacy.
What concepts do we use when we make probability estimations?
Representativeness heuristic and availability heuristic
What is the availability heuristic?
The more examples of X come to mind, the more likely X is.
Why is availability heuristics challenged? Give precise factors for this.
Because our recalling capability is biased (easier or more difficult to recall certain examples), some of the factors are:
Familiarity - (celebrity names) more likely for something to come up to our mind and to think of its occurrence in the real world to be higher
Recency - recent terrorist attacks - increased sense of likelihood to become a victim of terrorist attacks recently (even though they were still substantially lower than rates in 70-80s - twice more likely for another terrorist attack to happen
Salience - estimates of causes of death (cancer vs. car crashes) - hear more likely on news of shark deaths or plane crashes because they’re exceptional!
What do anchoring and insufficient adjustment mean?
Pieces of information that we encounter first tend to matter somewhat more than future information. (more than 65 countries in UN vs less than 10)? High number first => adjust response based on high number reference point; low number first => adjust response based on low number reference point;
NOTE: This anchoring can occur effectively even if the anchor (last digits of social security number) is not relevant to subsequent judgments (determining a price of a product);
What is the main theme reason for bias in the use of System II?
Choice context effect - the context in which a choice happens - how alternatives are presented to people can affect the choice a person makes
Give examples of choice context effect?
1) Attraction effect - introducing an intermediate (dominant) option between two options (options becoming 3) can make people be substantially more attracted towards one of the initial two options.
2) Compromise effect - small and medium vs small, medium and large (medium becomes more attractive COMPROMISE option)
What are binary choice, attraction effect, and compromise effect?
Binary choice - A and B (two options)
Attraction effect - A, B and C - C being a dominator and increasing the preference towards A or B
Compromise effect - Small and medium vs Small, medium and large - medium becomes a compromise option (between small and large);
NOTE: People justify their choices with System II thinking -adding extra options which seemingly increase rationality, and that still leads to biased results.
