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9.

1 Biases in probability assessment


9.1.1 Introduction
Most of the methods that are designed to help people to make decisions under conditions of
uncertainty require estimates of probabilities for the possible outcomes of the decision. Because
of the unavailability of suitable statistical data, these probabilities will usually be subjective
estimates based on human judgment.
Test your judgment
1. Currently, 10 people work in an office and each has a 5% probability of leaving during
the next year. Estimate the probability that at least one of these people will leave within
the next 12 months. (Assume that the chance of any one person leaving is independent
of whether the others stay or leave.)
2. In Britain are you more at risk of fatal injury if you (a) spend an hour riding fairground
machines or (b) drive a car for an hour?

9.2 Heuristics and biases


Much of the research on the quality of human judgment of probability has stemmed from the
work of Tversky and Kahneman1 who published their ideas in a series of well-written and
accessible papers starting in the early 1970s.

9.3 The availability heuristic


Suppose that you are asked to assess the probability that a retail business will fail within the
next year. If you use the availability heuristic, you will search your mind in an attempt to recall
examples of shops failing or you will try to imagine circumstances which will lead to the demise
of the business.
People using the availability heuristic therefore judge the probability of the occurrence of events
by how easily these events are brought to mind.
Availability can be a reliable heuristic. Frequently occurring events are usually easier to recall so
the higher probabilities estimates for them should be reliable.
9.3.1 Biases associated with the availability heuristic
1. When ease of recall is not associated with probability
Easily recalled events are not necessarily highly probable. In Britain a study by the Association
of Chief Police Officers in 1996 found that elderly people were rarely victims of violent crime. Yet
the perception of elderly people was that the risk of their being attacked was frighteningly
high. Although rare, when they do occur, attacks on old people are headline news and instances
of such crimes are therefore easily and vividly recalled.

2. Ease of imagination is not related to probability


Easily imagined events are not necessarily highly probable. The civil engineer in charge of a
construction project may find it easy to imagine all of the circumstances which could lead to the
delay of the project such as strikes, adverse weather conditions, geological problems and
interruptions in the supply of materials and equipment. The result could be a gross overestimate
of the risk of the project overrunning the deadline. Conversely, risks may sometimes be
underestimated because the dangers associated with a course of action are difficult to imagine.
Test your judgment: answers to questions 13
Were your probability estimates in the questionnaire distorted by ease of recall or ease of
imagination?
1. Approximately 1 in 500 people were victims of robbery in the USA in 1991, according to
the official statistics.
2. In Britain, driving a car for an hour is seven times more likely to lead to fatal injury.

3. Illusory correlation
Suppose that you are a manager of a factory and you are considering whether you are more
likely to obtain defective goods from a domestic or foreign supplier. Before thinking about your
answer you may already have some preconceptions, for example that foreign goods tend to be
less reliable. In this case, you are likely to find it easy to recall or imagine instances of the cooccurrence of the events foreign supplier and goods defective.
In decision analysis models, illusory correlation is of concern when conditional probabilities (e.g.
p(goods defective|foreign supplier)) have to be estimated.

9.4 The representativeness heuristic


representativeness heuristic judging how representative the object, person or event is of the
category or process.
For example, Peter was a street-wise extrovert who talked quickly and wore smart clothes. If
you judge him to be representative of what salesmen are like, that is he fits your stereotypical
view of a salesman, then you would assume that his chances of being a salesman are high.

9.4.1 Biases associated with the representativeness heuristic


1. Ignoring base-rate frequencies
If you find that only 10% of the delegates at your conference party were sales people then this
should clearly be considered when you estimate the probability of Peter being a salesman.
Unfortunately, judgments based on how typical Peter is of salesmen make no reference to this
statistical information (or base-rate frequency). This tendency to ignore base-rate frequencies
was demonstrated by Tversky and Kahneman in a series of experiments where subjects were
asked to judge the probability that individuals had particular occupations.
2. Expecting sequences of events to appear random
When a sequence of events is generated by a random process people expect the sequence to
represent the characteristics of randomness.
For example, if a coin is about to be thrown six times they would tend to expect the sequence HH-H-T-T-T to be less likely to occur than the sequence T-H-H-T-H-T which appears to be more
representative of a random process (of course, both sequences are equally likely). The belief is
that even short sequences of events should manifest the essential characteristics of the random
process that is generating them.
3. Expecting chance to be self-correcting
If a fair coin is tossed and a long sequence of heads appears, many people will think that the
occurrence of a tail on the next throw is highly probable because the tail is overdue. In a random
process, after all, one would expect the occurrences of heads and tails to be equally frequent.
The phenomenon can also be seen in newspaper articles about lotteries which advise readers
to identify cold numbers, that is, numbers which have not been drawn for a long period and
therefore must have a higher probability of appearing in the next draw. Of course, coins and
lotteries have no memories so there is no reason at all why they should correct for earlier
sequences of results. This bias is another consequence of the belief that random sequences of
events should be representative of what a random process is perceived to look like.

4. Ignoring regression to the mean


regression to the mean is widely ignored or misunderstood. According to Tversky and
Kahneman, people assume that, when an event follows an extreme event, itwill be maximally
representative of the extreme event. In other words, people expect extremes to be followed by
similar extremes. They expect extremely tall fathers to have sons as tall as them and extremely
high sales in one month to be followed by the same level of sales in the following month.
Failure to recognize regression to the mean can have important consequences. Tversky and
Kahneman describe the case of the flight instructors who praised trainee pilots after
exceptionally smooth landings and admonished them after rough landings. As a result of
regression to the mean, exceptionally smooth landings tended to be followed by poorer landings
on the next flight, while rough landings were followed by better landings. This led to the
mistaken belief, by the flight instructors, that criticism was more effective than praise.
5. The conjunction fallacy
The conjunction fallacy will have important implications when we consider scenario planning in
Chapter 15. The more detailed and plausible a scenario is, the more likely it will appear to be,
even though more specific scenarios must have a lower probability of occurring than general
ones.
For example, if a company is formulating possible scenarios for a time period five years from
now, the detailed scenario, War in the Middle-East between Israel and a neighboring state
leads to rocketing oil prices and economic recession in both Western Europe and the USA, may
seem more plausible, and hence more probable, than the general scenario, Economic
recession occurs in both Western Europe and the USA.

9.5 The anchoring and adjustment heuristic


The adjustment from these initial values is often insufficient, a phenomenon known
as anchoring.
9.5.1 Biases associated with anchoring and adjustment
1. Insufficient adjustment
In decision making, anchoring can be a problem in the estimation of costs, payoffs
and probabilities. Forecasts that are used in the decision process may be biased by
forecasters anchoring on the current value and making insufficient adjustment for
the effect of future conditions.

2. Overestimating the probability of conjunctive events


the estimation of conjunctive events is particularly important in planning. Projects
such as the development of a new product or the completion of a construction
project on time involve a series of elementary events, all of which must succeed for
the undertaking as a whole to be successful. While the individual probability of each
of the elementary events succeeding may be high, the overall probability of success
may be low. The tendency of people to overestimate probabilities for conjunctive
events may therefore lead to unjustified optimism that the project will succeed.
3. Underestimating probabilities for disjunctive events
Disjunctive events can be expressed in the form either X or Y occurs. Examples
would be either the ignition system or the cooling system in your car fails this
week and either bad weather or supplier problems cause delays in the project.
When asked to estimate the probability of a disjunctive event it appears that, once
again, people anchor on one of the elementary events. With disjunctive events this
leads to a tendency to underestimate the probability.
Since the estimation of risk often involves probability assessments for disjunctive
events, this bias can be a serious concern.
4. Overconfidence
Suppose that you are a maintenance manager and you are asked to provide
optimistic and pessimistic estimates of how long the overhaul of a machine will
take.