Bounded Rationality 2

Question 1

what did Kahneman & Tversky do?

Answer 1

documented numerous deviations from normative decision-making. Their explanation was that people often rely on heuristics to make decisions, these lead to systematic biases. The resulting research programme became known as heuristics and biases.

Question 2

what did Tversky and Edwards (1966) find?

Answer 2

• judges probability matched when they were asked to predict which of two lights was going to turn on next.
• optimal strategy would be consistently choosing the left light, which would lead to a success rate of 70%.
• found that participants predominantly probability matched those frequencies
• the results do not depend that much (after some time) on whether people are being made aware of these probabilities or have to learn them

Question 3

what is local representiveness?

Answer 3

the belief that a series of independent trials with the same outcome will be followed by an opposite outcome sooner than expected by chance.
- If Ps are asked to write down a random sequence of numbers (or letters, or coin tosses) they tend to try and make the sequence look random at every point. Kahneman & Tversky (1972)
- ps exclude long runs
- try to make each number more equifrequent than would be by chance

Question 4

what is gambler’s fallacy?

Answer 4

• when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events
• e.g. in a coin toss had 5 heads so assume next must be tails but the likelihood isn’t enhanced
• history has no predictive power
• different in a lottery where there is limited sampling e.g. draw a 6, 6 cant be drawn again

Question 5

what is the hot hand? Gillovich, Vallone, & Tversky (1985)

Answer 5

• examined people perceptions of the “hot hand” (or lucky streaks) in basketball (the same thing applies to any game including poker).
• They reported statistical analyses of lucky streaks for specific basketball players and reported that these were simply misperceptions. In truth successful shots during lucky streaks were no more likely than that players overall probability of a lucky streak…lucky streaks are an illusion.

Question 6

why does local representativeness occur?

Answer 6

• Humans are often pretty crap at distinguishing random coincidences from systematic patterns
• The human brain searches for patterns in everything (‘attribution’) and deserves explanations
• humans massively mis-interpret short sequences

Question 6

what is base rate neglect?

Answer 6

• the tendency to ignore relevant statistical information in favour of case-specific information

Question 7

Tversky & Kahneman (1982) base rate neglect study

Answer 7

• A cab was involved in a hit and run accident at night. Two cab companies, the Green and the Orange, operate in the city. You are given the following data : 85% of the cabs in the city are green and 15% are orange.
• A witness identified the cab as orange. The court tested the reliability of the witness under the same circumstances that existed on the night of the accident and concluded that the witness correctly identified each one of the two colours 80% of the time and failed 20% of the time.
• people tend to think that the taxi was more likely to be orange than green ie > 0.50, and many say p = 0.80.

Question 8

what is the representativeness heuristic?

Answer 8

a mental shortcut that we use when making judgments about probability
- e.g. Which of the following two scenarios is more likely?
- 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-war demonstrations.
- Linda is a bank teller OR Linda is a bank teller and is active in the feminist movement.
- 90% of subjects feel that Linda is more likely to be a feminist bank teller than just a bank teller (and similarly think a war triggered by a 3rd country more likely)

Question 9

what is the conjunction fallacy?

Answer 9

• The conjunction or co-occurrence of two events cannot be more likely than the probability of either event alone
• According to Tversky & Kahneman (1982) the fallacy occurs because specific scenarios appear more likely than general ones. This is because they are more representative of how we imagine them

Question 10

what are the criticisms on Kahneman et al’s methods?

Answer 10

1. methodological probelms = the way the question was asked / the answer options given about Linda the Bankteller story - Participants may consider these answer alternatives as mutually exclusive (XOR), i.e. they might subjectively interpret option 1 e.g. that the bank teller is a bank teller and not a feminist
2. Where does Kahneman go wrong with the Steve the librarian example? Why might this example be kind of invalid? Try to argue with the Bayes formula
   - Kahneman bases his argument solely on the fact that, apparently p(Farmer)»_space; p(Librarian)
   - What is the likelihood p(traits* | farmer) vs p(traits* | librarian)??* very shy, withdrawn, little interest in the world of reality, meek and tidy soul, need for order and structure, a passion for detail

Question 11

what is anchoring and adjustment heuristic?

Answer 11

a cognitive heuristic where a person starts off with an initial idea and adjusts their beliefs based on this starting point. Anchoring and adjustment have been shown to produce erroneous results when the initial anchor deviates from the true value.

Question 12

what is hindsight bias?

Answer 12

the tendency to view what has already happened as inevitable and obvious without realising that retrospective knowledge the outcome is influencing one’s judgement…I knew it all along

Question 13

Hindsight bias (Fischhoff, 1975)

Answer 13

• asked Ps to read true historical accounts of incidents which they were unfamiliar with. Including the battle between the British and the Nepalese Ghurkhas (1814).
• Half the Ps were told the outcome.
• Ps were then asked to assign probabilities to possible outcomes.British won, Ghurkhas wo, Stalemate
• Ps told the outcome give a higher probability to the actual outcome than those who were uninformed.

Question 13

Framing

Answer 13

Imagine the U.K. is preparing for the outbreak of an unusual disease, which is expected to kill 60000 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the program are as follows :
A. If program A is adopted, 20,000 people will be saved.
B. If program B is adopted, there is a 1/3 chance that 60,000 people will be saved, and a 2/3 prob. that no people will be saved.
C. If program C is adopted, 40,000 people will die.
D. If program D is adopted, there is a 1/3 prob that nobody will die, and a 2/3 prob. that 60000 people will die.
- people preferred option A and D to B and C
- Although the numbers are the same in that option A = C, and B = D, the framing of the question drastically reverses the response pattern humans make 
- risk averse for gains – lives saved for certain is more precious…
risk seeking for losses – the current reference is no-one has died yet, we want to avoid the loss of any life