HEURISTICS AND BIASES

Why we occasionally make stupid choices.

The holiday season has come and gone, leaving you with seven extra pounds. In an attempt to lose weight, you decide to reduce the fat in your diet. Upon arriving at a party, you sit in front of a bowl of your favorite, high-fat treats (cashews, potato chips, caramel popcorn, etc..) One goes into your mouth, and soon the bowl is empty. You have consumed over 60 grams of fat.

The next day you regret your decision and wonder how you could have so easily ignored your resolution to cut fat.

The DOER self and the PLANNER Self

In our daily lives we constantly make choices between what we want to do and what we should do. In almost all of these (and many other cases) one of our two selves is in favor of a decision that provides immediate benefit rather than an alternative that provides greater rewards in the future.

The War Inside Us

The DOER self gives in to TRANSIENT concerns or needs, temporarily ignoring the PLANNER self.

The solution lies in the ability to identify actions that your planner self can take to control your doer self. We tend to give too much weight to proximal (situational) attributes (physical, sensory, emotional etc.) in decision making.

WHEN MOTIVATION AND COGNITION COLLIDE

We have preferences that put us in disagreement with ourselves. What we WANT TO DO and what we SHOULD DO collide. The WANT will tend to dominate when only one option is presented to us. The SHOULD tends to take over when we have multiple options.

Hypothetical Example

I offer to give each of you $7 to participate in a study that will take 40 minutes. How many of you will participate? I offer to give you $8 to participate in a study that takes 40 minutes, but you know another class is getting $10 each to do the same 40minute study. How many of you will participate?

The test used three separate groups

Group 1: Volunteers are offered $7 for a 40 minute study. Group 2: Volunteers are offered $8 for a 40 minute study but are told that another group is getting $10. Group 3: Volunteers can to do either or not participate

Results:
Group 1: Group 2: Group 3: 72% volunteered for the $7 study 55% volunteered for the $8 study 16% volunteered for the $7 study 56% volunteered for the $8 study 28% chose not to participate

Group 1:
Group 2: Group 3:

72% volunteered for the $7 study

55% volunteered for the $8 study 16% volunteered for the $7 study 56% volunteered for the $8 study 28% chose not to participate

In Group 1, there is only one option and the WANT self dominates. In Group 2, there is only one option which is $8 but people focus on the affective (emotional) issue of fairness and so willingness to be involved drops. In Group 3 there are more choices and people are more rational, allowing the SHOULD self to reflect on the choices.

WANT versus Should

The The

Should is not always right.

Want self may convey important information about emotions that is underweighted by the Should self. need to recognize when our Want self is disagreeing with our Should self. tends to be short-term and Should is longer-term.

We

Want

POSITIVE

ILLUSIONS

Most people view themselves, the world, and their future in considerably more positive light than is objectively likely or that reality can sustain. A. Unrealistically Positive Views of Self

Individuals tend to perceive themselves as being better than others on a variety of desirable attributes.

B. Unrealistic Optimism

This refers to a bias in judgment that leads people to believe that their futures will be better and brighter than those of other people.

POSITIVE ILLUSIONS

C. Illusion of Control

People falsely believe that they can control uncontrollable events. They overestimate the extent to which their actions can guarantee a certain outcome.

D. Self-serving attributions

People are biased in how they explain the causes of events. They tend to take a disproportionately large share of the credit for collective successes, and they accept too little responsibility for collective failures.

Victory has a thousand fathers, but defeat is an orphan. J.F.K.

Self-Serving Biases

Studies of Negotiators found that:

When successful they attributed success to internal / personal reasons. Failures were attributed to external reasons.

Self-Serving Biases play a big role in assignment of blame. Self-Serving Biases extend to the groups to which we belong. Self-Serving Biases lead us to denigrate those more successful.

Biases of Positive Illusions

In a simulation study done by Tyler and Hasti (1991) each member of an organization was assigned a value representing their true worth and a value based on their perceived worth to the organization. The average employee had a perceived worth that exceeded their true worth, creating a world in which the typical member engaged in a mild level of self-enhancement. Employees then received rewards based on their true value. Since their expectations overestimated their true worth, rewards were insufficient to meet their expectations of their entitlements, and dissatisfaction resulted. In fact, the most valued employees emerged as the most dissatisfied in this simulation, because they had the most inflated sense of self worth.

EGOCENTRISM

Closely related to Positive Illusions. Our perceptions and expectations are biased in a self-serving manner. People, exposed to the same information, interpret it in a way that favors themselves. Assessments of what is fair are often biased by self-interests. Egocentrism makes everyone believe that it is fair for them to have more rewards than an independent advisor would judge.

Examples of Egocentrism

When husbands and wives are asked individually, what percent of household work they each performed, the percentages always add up to more then 100%. Football fans from Princeton & Dartmouth were asked to view a short film of a football game between the two schools. Both sides watched the same film, yet each side thought the opposition team played more unfairly and engaged in more aggressive and un-sportsman-like conduct. Researchers attempted to reduce this bias by paying participants to accurately predict a judges ruling, and then had them write an essay arguing the other sides point of view. This had no measurable effect on peoples biases.

Regret

Your out-of-town business meeting runs overtime and you are trying to make an 8:30 P.M. airline flight to get home that night. If you miss it you have to find a hotel and spend the night. Your taxi gets caught in traffic and you do not get to the gate until 8:52 A. You find out the plane left on schedule at 8:30. B. You find out that the plane was also delayed and is just pulling away from the gate. Which is more upsetting?

Avoidance of Regret

Avoiding regret has clear effects on decision making. In the absence of feedback, people hold positive illusions about the quality of their decisions and their outcomes. When feedback is expected on both what the decision maker did and did not do, individuals change their behavior to avoid unfavorable feedback. We tend to choose options that shield us from feedback on alternatives we do not choose.

Example: You could go with your friends to Cancun or to Bermuda for spring break.

Situation 1: Your group of friends all go to Bermuda. You dont worry about getting feedback about what might have happened if you went to Cancun since no one went there. Situation 2: Some of your friends go to Bermuda and some decide to go to Cancun. You have some concern that if you go to Bermuda, you will find out later from your friends that Cancun would have been a better choice. Consequently you may decide to spend more time and effort researching than you would have otherwise in order to insure that your choice is the best one.

REGRET AVOIDANCE
People feel greater regret for actions than for inactions. We tend to avoid the possibility of negative feedback when making decisions.

When feedback is inevitable, we tend to adjust our decisions in order to avoid afterthe-fact, unfavorable comparisons between what we did do and did not do.

REGRET EXAMPLE

Bob is a freshman at TCNJ. His parents are paying all of his expenses. He is having trouble balancing his need to study and his desire to party and have fun. Scenario 1: Bobs parents insist on seeing his grades at the end of each semester. Scenario 2: Bobs parents dont care about seeing his grades, so he doesnt have to worry about it. Faced with the possibility of unfavorable feedback in Scenario #1, Bob will probably decide to do more studying than he will in Scenario #2.

Emotions and Decisions

Anger makes people optimistic and riskseeking in their decision making. Fear makes people pessimistic and risk-averse in their decision making. Sadness makes people eager to buy things.

When you are sad youre trying to change your circumstances.

Disgust makes people unlikely to buy anything at all.

When you are disgusted youre trying to cleanse.

The Bias of Beauty

Beautiful people are happier, but for different reasons. Women feel that beauty is inherently important. They are more apt to find joy simply from looking in the mirror. People have higher expectations for beautiful people, and expect less from unattractive people.

Attractive people are more likely to be hired in a recession.

Voters are biased towards the more attractive candidate.

The Economics of Beauty

Beauty is a scarce commodity.

In 2010 Americans (mostly women) spent $845,000,000 on facelifts. Handsome men make13% more during a career than their looks-challenged peers. Homely quarterbacks earn 12% less than their easy-onthe-eyes rivals.

One study showed that handsome economics professors earned 6% more than their less-attractive colleagues.

Heuristics
Rules-of-thumb for making decisions. Simplified strategies or rules which direct or judgment Examples...

Dont date someone who picks their nose. Tall, handsome men make better presidents than short, ugly ones. The longest answer is probably correct.

Benefits & Drawbacks

Heuristics provide time-pressured managers with a simple way of dealing with a complex world. People frequently adopt them without being aware of using them. When we use them unconsciously, we have no control over when they are used appropriately or inappropriately.

The Availability Heuristic

We think of things that are easily remembered (available to consciousness)

People assess the frequency, probability, or likely cause of an event by the degree to which instances or occurrences of that event are readily available in our memory.

Examples of availability heuristic

You buy the same make and model car that your friend always raves about, even though Consumer Reports says that these cars have a higher-than-average maintenance cost.
You refuse to ride on a motorcycle because when you were young, your older brother died in a motorcycle accident.

The Availability Heuristic

More frequent events are recalled more easily. Likely events are easier to recall than unlikely events. In response to this, we have developed the availability heuristic for estimating the likelihood of events. In many cases this heuristic leads to efficient judgments. However, we too easily assume that our recollections are truly representative of some larger pool of occurrences that exists outside our range of experience. That is when we make bad judgments.

Representativeness Heuristic

We assess the likelihood of an events occurrence by the similarity of that occurrence to our stereotypes of similar occurrences.
EG: She looks too much like my ex-girlfriend, so Im not going near her. EG: A manager from R&D approaches the marketing manager with an idea for a new product.

The Marketing manager replies: Other similar products introduced by our competitors did not do well in the market so we should avoid this type of product.

The Anchoring and Adjustment Heuristic

We tend to make assessments by starting from an initial value and adjusting to yield a final decision.

May be helpful, or may be misleading EG: We sold $1.2 million in product last year so we should sell at least that or more this year. Dont use this without due consideration.

Capturing Expertise

Can we believe what experts tell us? Are experts more believable than novices? What are the limits of learning from the experts?

Professor Johnson goes to Medical School

Dr. Paul Johnson is a cognitive psychologist at the University of Minnesota. Dr. Johnson spent part of a sabbatical year attending classes at the University of Minnesota School of Medicine. He studied his colleagues lectures, and then he studied his colleagues behavior when they were interacting with patients.

And now the bad news

Johnson found that the material taught in lecture correlated only modestly with the clinical behaviors of the medical faculty who gave the lectures. The paradox of expertise: As humans become increasingly expert at performing a task, they become increasingly unable to explain what they are doing.

Stages of skill acquisition

Verbal: Actions are rehearsed verbally.

We are told how to drive a car.

Associative: Verbal mediation begins to disappear as intuition takes over.

We practice until it becomes automatic.

Autonomous: Actions are performed without conscious thought.

We do it without thinking about it.

The results of automatization

We perform advanced tasks without even thinking about them. When we are forced to give an explanation of what we are doing, our thoughts often are inaccessible to us. It is not socially acceptable to admit that we dont know what we are thinking, so we provide an explanation that seems plausible.

Slovic & Lichtenstein study

Stock brokers were asked to weigh the factors that influenced their investment decisions. For novice stock brokers, the methods that they articulated correlated nicely with the investment decisions that they made. For senior stock brokers, there was very little correlation with what they said and what they did! However, the methods that they articulated matched those of the novice stock brokers quite well.

Selective Perception

We are often predisposed to a particular view, and therefore only see that which supports our view.
A set of televised news segments regarding the 1982 massacre of Arab civilians in Lebanese refugee camps was shown to:

68 pro-Israeli college students

27 pro-Arab college students 49 neutral college students

Each non-neutral group reported that the news coverage was biased in favor of the other group. Each group differed wildly in their counting of favorable and unfavorable references that had been made to Israel.

In clinical encounters
(Doctors are prone to selective perceptions)

We know that physicians begin to generate diagnostic hypotheses almost immediatelyoften before the patient even speaks!

These are normally biased toward the doctors expertise.

Preconceptions about a patients problem can prevent physicians from perceiving data that could broaden the diagnosis and problem list.

Preconceptions may also interfere with the ability to remember the relevant patient data that actually were presented.

BIASED MEMORY Subjects memory of a film clip of an auto accident (Loftus & Palmer)

Groups of people were shown a video clip of a car accident and later asked how fast the cars were going when the cars_____ smashed? Mean reported speed 40.8 collided? Mean reported speed 39.3 bumped? Mean reported speed 38.1 hit? Mean reported speed 34.0 contacted? Mean reported speed 31.8
(The video did not indicate how fast the cars were traveling)

Did you see any broken glass at the scene of the accident when the cars ?
Wording > Smashed Response Hit

Control group

YES

16

NO

34

43

44

PS: There wasnt any glass evident in the video clip.

Martha is envious, stubborn, critical, impulsive, industrious, and intelligent.

Select the one best answer: a. Martha is likely to be highly emotional. b. Martha is likely to be a good student.

Steve is intelligent, industrious, impulsive, critical, stubborn, envious

Select the one best answer: a. Steve is likely to be highly emotional. b. Steve is likely to be a good student.

Who is the better student?

a. Martha

b. Steve
c. Neither is better than the other.

HALO EFFECT

Characteristics that we consider early on remain the most salient. First impressions are the most important, but second and third impressions are important too. The general cognitive bias is called anchoring.

Our thinking tends to be biased (anchored) by the first impression or first information we are given.

Biases covered so far

Availability Heuristic Representativeness Heuristic Anchoring and Adjustment Heuristic Capturing Expertise Selective Perception Preconceived Expectations Biased Memories Halo Effect (First Impressions bias)

Analysis of The Questionnaire

Lets see how you did on your answers!

Problem #1. Ranking the corporations

Most people pick Group A because of the availability heuristic. This group contains consumer firms which are more familiar. The correct answer is Group B. In fact, total sales for Group B was double that for group A.

Question #2 The MBA students major

Most people pick Chinese studies because they focus on the description of the student as shy and small.

This ignores the fact that Chinese studies majors are very scarce in comparison to Psychology majors. And it is rare a Chinese studies major seeks an MBA.

It is an example of the representativeness heuristic. People tend to stereotype Chinese (and Chinese studies majors) as small and shy.

Is driving or flying riskier?

This is bias from Ease of recall based on vividness and recency.

Research has shown that when an individual judges the frequency of an event by the availability of its instances, an event whose instances are more easily recalled will appear more numerous than an event of equal frequency whose instances are less easily recalled.
Airline Crashes are more easily recalled than auto accidents.

Ease of Recall Bias at work.

We tend to over-estimate the probability of unlikely events we have witnessed. We tend to under-estimate the probability of likely events we have never witnessed.

Problem #4. Are there more words starting with r or having r as the third letter?

Most people are inclined to say starting with r.

That is because we store and search for words in our brain based on starting letters rather than third letters. Thus we can think of more words starting with r and conclude that they are more numerous. They are not!

This is an example of Bias #2Retrievability

(based on memory structures)

Is Marijuana use related to delinquency?

Most people tend to say yes because they can think of several delinquent marijuana users and assume a correlation. Proper analysis requires examining four groups: users, non-users, delinquents and non-delinquents) Users Non-users
Non-users who are delinquent Non-users who arent delinquent

Delinquent
Not Delinquent

Users who are delinquent Users who are not delinquent

Dichotomous Events
Dichotomous Events are events with two possibilities (A user or non-user is one dichotomous event.) The preceding example had two dichotomous events. There are always four separate situations to be considered in assessing the association between two dichotomous events. This is the bias of Presumed Associations

Are couples who get married under the age of 25 more likely to have bigger families?

Our initial presumed associations tend to make us say yes because they have more time to do so.
Married Under 25 Large Families Smaller Families
Married young with large families Married young with small families

Married Over 25
Married older with large families Married older with small families

Summary of biases from the Availability Heuristic

More frequent events are recalled more easily. Likely events are easier to recall than unlikely events. In response to this, we have developed the availability heuristic for estimating the likelihood of events. In many cases this heuristic leads to efficient judgments. However, we too easily assume that our available recollections are truly representative of some larger pool of occurrences that exists outside our range of experience. That is when we make bad judgments.

BIASES EMINATING FROM THE REPRESENTATIVENESS HEURISTIC

Problem #5: The MBA Graduate

Most people assess this by analyzing the degree to which Mark is representative of their image of individuals who take jobs in each of the two areas.

Consequently they conclude he will take a job in the arts. i.e. the number of MBAs taking jobs in the arts and the number of MBAs taking jobs in management consulting. The latter category is much greater. There are probably a large number of people in arts management who fit Marks description. But there are a much larger number of people in consulting who fit Marks description.

It is an example of Insensitivity to base rates

Asking the right question

How the question is asked often biases the answer. If you answered arts, you probably asked yourself the question: How likely is it that a person working in the arts would fit Marks description? You might have given a different answer if the question was: How likely is it that a person of Marks description will choose arts management? Most surveys are biased in how they ask their questions.

Question #6: The Blind Road Test of the Colt and Champ

You should have answered B because it has a smaller sample size (22 rather than 66), and is thus subject to greater deviation from the mean. People who get this wrong focus on the number of days available and pick group A because it had 10 additional days to find deviations of 60% or more. This is Insensitivity to sample size.

Question #7: Hiring your 5th sales director.

This illustrates the bias of Misconceptions of Chance. The performance of the first four sales directors will not directly affect the performance of the fifth. The probability of getting four bad sales directors in a row is very low.

The probability of any one being bad is independent of the others.

Problem #8: Forecasting Sales

Without more information most people simply add 10% to each departments 2012 sales.

With more historical data, we could determine the correlation between time and sales.
Then we would know the degree to which 2012 sales was a predictor of 2013 sales.

The Correlation Dilemma

A perfect correlation of 1 would substantiate adding 10% to each. store #1s forecast would be (12 mil. + 1.2 mil.) = 13.2 mil. Zero correlation would mean last years sales were irrelevant. In this case one could simply divide 2012 sales by the number of stores. store #1s forecast would be (99 mil. / 9) = 11 mil. Since we dont know what the correlation is, the actual forecast for store #1 is somewhere between 13.2 million and 11 million. A correlation of either zero or one is highly improbably.

Regression To The Mean

The Sales Forecasting problem represents the bias of Regression to the mean. Even if you had perfect correlation of 13.2 million, you should expect it to regress toward the mean of 11 million.

100% Correlation
Increase 2012 sales by 10%

Zero Correlation
Use 1/9th of total sales

Some Correlation
Somewhere between the two

Store 1 2 3 4 5 6

2012 12,000 11,500 11,000 10,500 10,000 9,500

2013 13,200 12,650 12,100 11,550 11,000 10,450

2013 11,000 11,000 11,000 11,000 11,000 11,000

2013 ? ? ? ? ? ?

Problem # 9: The Philosophy Majors Description

Examine where C, F, H fall in your ranking. C=Feminist; F=Teller, H=Teller + Feminist

There are six possibilities for these three:

CFH

CHF

FCH

FHC

HFC

HCF

Most people rank them C-H-F because it is the order of the degree to which they represent the short profile. In fact, both C and F must be ranked higher than H.

This is the Conjunction Fallacy.

A Conjunction is a combination of two or more descriptors.

Bank Tellers who are Feminists

Tellers F

Feminists C

A basic law of probability is that a subset (H) cannot be more likely than a larger set (F or C) that completely includes the subset.

Which is more likely?

1. A complete suspension of diplomatic relations between the USA and China. 2. A Chinese invasion of Taiwan, followed by a complete suspension of diplomatic relations between the USA and China.
3. A Chinese invasion of Taiwan.

Again the conjunction fallacy.

B is a subset of A and of C, which makes it less likely to occur than either A or C, because B requires both A and C to happen. A or C has a higher probability than A and C A
Break Relations

C
Invasion Both of Taiwan

THE ANCHORING AND ADJUSTMENT BIAS

Problem #10: Annual Salary

Was your answer affected by the secretarys response?

You may not think so, but it probably was.

This question was given to two different groups, with one group seeing the question as you have it, and the other group seeing $80,000 as the secretarys estimate. The average response of the first group was $20,000 lower than the average response of the second group.

This is bias due to Insufficient anchor adjustment

We are biased by the initial anchor, even if it is irrelevant.

This relates to the Halo Affect. We are biased by first impressions.

Different starting points (anchors) yield different answers.

Other Examples of the Insufficient Anchor Adjustment

A child who is anchored in the slow group will not do as well as an equally capable child anchored in a highachiever group.
First impressions of people have greater emphasis and slow the rate at which we change our opinion of them. A speed limit of 45 mph seems slower when we have been driving 65 mph than it does when we have been driving 25. A price of $150,000 for a house seems like a better deal if it was lowered to that price than if it was raised to that price.

A Large Group of Professional Auditors were randomly split into two groups and asked the following
Group 1

Group 2

Based on your experience, is the incident of executive fraud more than 10 in each 1000 firms? (1%)

Based on your experience, is the incident of executive fraud more than 200 in each 1000 firms? (20%)

This groups answers averaged 16 firms per 1000

This groups answers averaged 43 firms per 1000

Be careful of the questions you ask!

As survey takers (and married people) are well aware How you phrase a question can often bias the answer you get.

Summary of biases from Anchoring & Adjustment

The need for an initial anchor weighs strongly in our decision-making processes when we try to estimate likelihood's or established values.

Experience has taught us that starting from somewhere is easier than starting from nowhere. Unfortunately, our starting points are often erroneous, but give us a false sense of security and tend to anchor (restrict) our thinking.

Problem #11 Flight to Chicago

You suddenly have to go to Chicago tomorrow. You call five different airlines and are told that all flights are booked. You can go standby but have the following probabilities of getting on the flights: Flt. 1 30% Flt. 2 25% Flt. 3 15% Flt. 4 20% Flt. 5 25% What is your probability of getting to Chicago on time? 73%

Conjunctive Events Vs. Disjunctive Events

Conjunctive events are events that must occur in conjunction with each other. We tend to overestimate the probability of Conjunctive events. Disjunctive events occur independently of each other.

We tend to underestimate the probability of disjunctive events.

The five flights to Chicago were disjunctive (independent) events.

Problem #12: Estimations

Mobil Oil Sales IBM Assets Chryslers profit US. Firms sales US GNP, 1945 Taxes collected Bridge-Tunnel $ 51,223,000,000 $ 63,688,000,000 $ 1,289,700,000 381 $ 212,300,000,000 $ 195,722,096,497 93,203

Area of Brazil
Population of S.F. Canadian exports

3,286,470
96,078 $ 2,386,282,000

The Overconfidence Bias

When faced with high uncertainty we tend to be overconfident. When faced with more familiar areas, our confidence tends to drop.

Consider the Ramifications of the Overconfidence Bias

You are a surgeon, about to operate. The patients family needs to know the likelihood of the patient surviving.

You respond 95%. (Overconfident of high uncertainty)

Your law firm has been sued and you can settle out of court or go to court. If you lose in court your firm will go bankrupt.

Your are 98% confident that you can win.

Be aware of those judgments that are particularly difficult to make.

Problem #13 Which card(s) verify or dispute the claim that when the analyst predicts a rise in the market, the market always rises?
Card 1 Prediction Favorable Report Card 2 Prediction Unfavorable Report Card 3 Outcome Rise in the Market Card 4 Outcome Fall in the Market

Card 1 serves as a direct confirming test. Card 2 has no relevant information since the claim does not pertain to unfavorable reports. Card 3 looks to see what prediction preceded a rise. The can add confirming evidence to card 1, but cannot disconfirm the claim. Card 4 is critical. If it says Favorable then the claim is disconfirmed.

This is the Confirmation Trap

Failure to look for disconfirming evidence.

It is easy to observe the confirmation trap in your decision making.

EG: You make a tentative decision to buy a fairly expensive item.

Do you search for information that supports your decision before making the purchase? Or, do you search for reasons not to make the purchase? Disconfirming evidence is equally, if not more, important.

The Hindsight Bias

The I knew it all along syndrome.

There is a natural tendency to over-estimate what we knew beforehand based on what we found out later. Hindsight reduces our ability to learn from the past and to evaluate objectively our decisions and those of others. Some have argued that people should be rewarded based on the process and logic of their decisions, not on results.

OVERALL USE OF HEURISTICS

Overall, use of these heuristics results in far more good than bad decisions. Unfortunately, most of us are unaware when we use them. We are unaware of the extent of impact they have on our decisions. Thus we fail to distinguish between situations in which their use is appropriate & those where they are less appropriate. The key to improved judgment lies in learning to distinguish between appropriate and inappropriate uses of heuristics. And being aware that we are using them!