Representativenes Heuristics and Biases s Heuristic

Making Decisions under Uncertainty

Many decisions are based on beliefs concerning

the likelihood of uncertain events

Who will win the election? How will a $ trade for a tomorrow?

Is the defendant guilty?

What determines such beliefs? How do people assess the probability of an

uncertain event or the value of an uncertain quantity?

We Use Heuristics
We reduce the complex tasks of assessing

probabilities and predicting values to simpler judgmental operations.

Resembles the subjective assessment of physical

quantities such as distance or size.

Example of how we judge the distance of an

object using clarity. The more sharply the object is seen, the closer it appears to be. This is mostly right but subject to systematic errors.

Introduction
What is a heuristic?

Why do humans use them?

Do heuristics help or hurt human decision making?

Definition
Heuristic refers to experience-based techniques for

problem solving, learning, and discovery. Heuristic methods are used to speed up the process of finding a satisfactory solution, where an exhaustive search is impractical.
Examples of this method include using a "rule of

thumb", an educated guess, an intuitive judgment, or common sense.

In more precise terms, heuristics are strategies using

readily accessible, though loosely applicable, information to control problem solving in human

History
Kahneman and Tversky

"Judgment under Uncertainty: Heuristics and Biases," Science,1974.

James Monitier Behaving Badly, 2/2006.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890563

Source of Bias
This seminal article by Tversky and Kahneman

describes three Heuristics people rely on to assess probabilities and predict values:
Representativeness
Availability Adjustment and Anchoring

Representativeness Heuristic
Many of the probabilistic questions with which

people are concerned belong to one of the following types:

1. What is the probability that object A belongs to

class B OR 2. What is the probability that process B will generate event A

To answer we rely on Representativeness Heuristic

Probabilities are evaluated by the degree to

which A is representative of B In other words, the degree to which A resembles B

Is A similar to B?

Example
Linda is 31 years old. She is single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and equality. Which is more likely?

1) Linda works in a bank

2) Linda works in a bank and is active in the feminist movement

Representativeness
It is more likely that Linda works in a bank. To argue that (2) is more likely is to commit a conjunction fallacy.
Bankers Tversky & Kahneman (1983) 85% of professional fund managers chose (1)

Feminists

Feminist Bankers

Source of the error?

The Representative Heuristic (rule of thumb) People base judgments on how things appear rather than how statistically likely they are.

People are driven by the narrative of the description rather than by the logic of the analysis.

Representativeness Explained
Representativeness can be thought of as the reflexive tendency to assess the similarity of outcomes, instances, and categories on relatively salient and even superficial features, and then to use these assessments of similarity as a basis of judgment.

We expect instances to look like the categories of which they are members; thus, we expect someone who is a librarian to resemble the prototypical librarian. We expect effects to look like their causes; thus we are more likely to attribute a case of heartburn to spicy rather than bland food, and we are more inclined to see jagged handwriting as a sign of a tense rather than a relaxed personality. Gilovich (1991), page 18

Example: Steve
Steve is very shy and withdrawn, invariably

helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.

Order the following occupations in terms of the probability in which Steve is engaged in them
Farmer Salesman Airline pilot Librarian physician

People order by probability and similarity in exactly the same way

Problem:

similarity, or representativeness, is not influenced by several factors that SHOULD affect judgments of probability

Our Insensitivities
1

. Insensitivity to prior probability or outcomes: what is the base-rate frequency

of the outcomes?
The fact that there are many more farmers than

librarians in the population should enter into any reasonable estimate of the probability that Steve is a librarian rather than a farmer

Example
Subjects shown brief personality descriptions of

several individuals Subjects asked to assess, for each description, the prob that it belonged to an engineer rather than a lawyer In one experimental condition, subjects were told that the descriptions had been drawn from a sample of 70 engineers and 30 lawyers In another condition, 30 engineers and 70 lawyers

Evidence, No Evidence, Worthless Evidence

When given no other information, subjects used

the prior probabilities (evidence) Evidence ignored when given a description + evidence Evidence ALSO ignored when given a useless description

Useless Description
Dick is a 30 year old man. He is married with no

children. A man of high ability and high motivation, he promises to be quite successful in his field. He is well liked by his colleagues.

Insensitivity 2
2. Insensitivity to sample size Example: What is the average height of the

following group of men?

N = 1000 N = 100

N = 10
How do you make this assessment?

Sample Size
People failed to appreciate the role of sample

size.
As n increases, variability decreases John Nunley and I both got decent student

evaluation scores last year (him: 3.87 me: 3.88

I taught 3 classes and he taught 6
Who is the better teacher?

Insensitivity 3
3. Misconceptions of chance (AKA the gamblers

fallacy)
People expect that a sequence of events

generated by a random process will represent the essential characteristics of that process even when the sequence is short.
Example: People think that

HTHTTH is more likely than HHHTTT or HHHTH

Chance
We think that chance will be displayed globally

and locally Imagine a roulette wheel at Vegas that has fallen on red for the last five spins The next spin MUST be black Right? RIGHT? We think black is due because it will look more like a representative sequence than if the wheel spins red.

More on Chance
We think of chance as a self-correcting process in

which a deviation in one direction induces a deviation in the opposite direction to restore the equilibrium. In fact, deviations are not corrected, rather as the chance process unfolds, they are diluted.

Insensitivity 4
4. Insensitivity to predictability: if predictability is nil, the same prediction should be made in all cases. Examples: which company will be profitable? What is the future value of a stock? Who will win the football game? What info do you have to make this assessment?

Predictions are often made by Representativeness

Three descriptions of a company: favorable,

mediocre, poor.
If mediocre description, mediocre prediction. The degree to which the description is favorable

is unaffected by the reliability of that description or by the degree to which it permits accurate description.
Predictions insensitive to reliability of evidence.

Insensitivity 5
5. Illusion of validity: The unwarranted confidence which is produced by a good fit between the predicted outcome and the input information
People are more confident in their predictions if they perceive that the inputs look more like the outputs-no regard for limits of predictability

Example: Accuracy versus Confidence

People express more confidence in predicting the

final GPA of a student whose first-year record consists entirely of Bs than in predicting the GPA of a student whose first year record includes many As and Cs. Basic statistics tells us we can make better predictions if we have independent inputs rather than redundant or correlated inputs

Insensitivity 6
6. Misconception of regression: people dont understand regression toward the mean. Consider two variables X and Y which have the same distribution. If one selects individuals whose average X score deviates from the mean of X by k units, then the average of their Y scores will usually deviate from the mean of Y by less than k units. Note: this was first documented by Galton more

Examples throughout life

Comparison of height of fathers and sons
Intelligence of husbands and wives Performance of individuals on consecutive

examinations
People do not develop correct intuitions about

this phenomenon 1. They do not expect regression in many contexts 2. When they do recognize it they invent spurious causal explanations.

Pilot Training Example

(Tversky and Kahneman (1974))

Pilot instructors note that

Praise for an exceptionally smooth landing is typically followed by a poor landing on next try. Criticism for a rough landing is typically followed by an improvement on next try.

Conclusion: Verbal rewards are detrimental to learning, while verbal punishments are beneficial.

Misconception of Regression
Probability
Whats more likely? Improvement or an even worse performance?

Mean

Performance

Bad

Conclusion
Research on the representativeness heuristic suggests several ways to improve judgment and decision making skills, including the following tips: Don't Be Misled by Highly Detailed Scenarios. Whenever Possible, Pay Attention to Base Rates. Remember That Chance Is Not Self-Correcting. Don't Misinterpret Regression Toward the Mean. By keeping these suggestions in mind, it is possible to avoid many of the biases that result from a reliance on the representativeness heuristic focuses on another well-known heuristic, availability," and the biases that often result from it.