Week 4

Question 1

What is representativeness

Answer 1

Our intuition for estimating probabilities is often dead wrong, because our estimations are influenced by how typical something is for its “category”.

We are very bad at estimating chances based on our intuition.

Question 2

What are the two primary reasons for representativeness?

Answer 2

Insensitivity to base rates
Insensitivity to sample sizes

Question 3

What is insensitivity to base rates?

Answer 3

our intuition tends to ignore base rates (priors)

Question 4

What is insensitivity to sample sizes?

Answer 4

we often fail to appreciate the importance of sample sizes.

Question 5

What is the conjunction fallacy?

Answer 5

Our estimation of probabilities is influenced by how specific an outcome is, we judge more specific outcomes more likely than general ones.

Question 6

What is the Gambler’s fallacy?

Answer 6

Mistaken belief than when something happens more than usual in some period, that this will continue in the future.

Question 7

What is the “hot hand effect” fallacy?

Answer 7

Mistaken belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts.

Question 8

What is pattern recognition?

Answer 8

Our brains see patterns everywhere, which we tend to judge as more likely incorrectly. We focus on developing cause-effect stories, but many things are due to chance and randomness which we overlook.

Question 9

What is regression to the mean?

Answer 9

People tend to overlook that numbers tend to their long-term average. Even a small amount of luck means there will be regression to the mean.

Question 10

What is the survivorship fallacy?

Answer 10

The mistaken belief that because someone or something survives, it must necessarily be better or have some specific unique characteristic (EG Bol.com).

Question 11

what is the Matthew Effect?

Answer 11

Phenomenon that through a positive feedback loop randomly selected early “winners” become more and more successful (EG hockey players).

Question 12

What is the confirmation bias?

Answer 12

we interpret new information as confirming our existing beliefs. We tend to search for - and give more weight to - new information that confirms our existing beliefs than information that disconfirms our beliefs.

Question 13

What is the result of confirmation bias?

Answer 13

People often hold their existing beliefs even in the face of overwhelming evidence of the contrary. Either consciously or unconsciously, we treat disconfirming information as unworthy or irrelevant or we misinterpret such information.

Question 14

What is motivated reasoning?

Answer 14

Developing stories or rationalizations that enable you to ignore or discredit disconfirming evidence such that you can hold on to existing beliefs or arrive at preferred decision outcomes.

It goes one step further than confirmation. You reason towards a certain outcome you want.

Question 15

What is overconfidence?

Answer 15

We tend to overestimate our own knowledge and capabilities. In all previous situations we relied too much on system 1 and too little on system 2.

Question 16

What is the mother of all biases according to Bazerman & Moore?

Answer 16

Overconfidence

Question 17

What is overprecision?

Answer 17

We feel to certain about the accuracy of our judgments and decisions.

Question 18

What is overestimation?

Answer 18

We think we are better, smarter, faster, more capable etc. than we actually are.

Question 19

What is overplacement?

Answer 19

We tend to falsely think we are better than others on certain dimensions.

Question 20

What is the planning fallacy?

Answer 20

The phenomenon that ‘realistic’ plans tend to be way too optimistic.

Question 21

What is the biggest hurdle in the planning fallacy?

Answer 21

Probability that at least some things go wrong is understated.

Question 22

What plays a role in the planning fallacy as well?

Answer 22

Incentives also play a role, meaning it is not only a cognitive issue.

Question 23

What is the conjunctive events bias?

Answer 23

Overstate conjunctive events
Understate disjunctive events

Question 24

What are conjunctive events?

Answer 24

Multiple things that all need to happen to realize a certain outcome.

Question 25

What are disjunctive events?

Answer 25

One of many possible things needs to happen to realize a certain outcome.

Question 26

What is the hindsight bias?

Answer 26

The failure to disregard subsequently acquired knowledge when judging a past event/decision. The (incorrect) feeling that you “knew it all along”.

Question 27

What is the outcome effect?

Answer 27

Evaluations of past decisions are affected by how things worked out.

Question 28

What is decision myopia?

Answer 28

Bounded awareness
When we answer a question we need to use all information, both from system 1 and system 2. We tend to ignore system 2 and not think carefully about the problem Thus we make a mistake.

Question 29

What are 3 examples of decision myopia?

Answer 29

• Anticipation of anticipation: what is the most appropriate level of strategic thinking? Most people dont go further than 2 levels.
• Monthy hall problem
• The Winner’s curse: winners of actions often end up paying too much. Also a reason why many M&A fail.

Question 30

What is the status quo bias?

Answer 30

The tendency to maintain the current situation (we chose for).

Question 31

What is the omission/commission bias?

Answer 31

We favor harmful omissions over equally harmful commissions. Acting feels worse than not acting, even if the outcomes are the same.

Question 32

What is an example of omission/commission bias with managers?

Answer 32

We favor managers that neglected over managers that acted if both result in bad outcomes.

Question 33

What is regret aversion?

Answer 33

The tendency to avoid actions we might regret. The feeling that we might feel in the future influences our decisions.

Question 34

What is escalation of commitment?

Answer 34

A pattern of behavior in which an individual or group will continue to rationalize their decisions, actions and investments when faced with increasingly negative outcomes rather than alter their course.

Many things come together here: sunk cost fallacy, status quo bias, omission bias, confirmation bias, etc.