Decision Making Traps

1
Decision Making Traps

• Traps in general
• Implications for Heuristic methods, forecasting,
  modeling in general.

2
1. Anchoring trap

• first impressions
• Time series forecasting?
• Credit risk model
• too many inquiries get negative weight
• (how many is too many?)

3
2. Status Quo Trap

• Thats the way it has always been
• Inertia
• School bullying
• Key - doing something wrong is punished
• doing nothing is generally not punished

4
3. Sunk Cost trap

• digging the hole deeper
• being blind to past mistakes
• corporate strategy -barriers to exit
• emotional attachment

5
4. Confirming Evidence Trap

• I have made up my mind, dont confuse me with
  facts.
• Eg. Political candidate who is more
  honest/worthy/qualified Bush or Gore?

6
5. Framing Trap

• Glass half full or half empty?
• Biases in surveys

7
Problem

• There are 600 people in a town that have been
  infected by a certain virus. There are two
  competing programs, of which one has to be
  selected.
• If Program A is adopted, 200 people will be saved
• If Program B is adopted, there is a one-third
  probability that 600 people will be saved and a
  two-thirds probability that no people will be
  saved
• Which of the two programs would you favor?

8
Problem

• There are 600 people in a town that have been
  infected by a certain virus. There are two
  competing programs, of which one has to be
  selected.
• If Program C is adopted, 400 people will die
• If Program D is adopted, there is a one-third
  probability that nobody will die and a two-thirds
  probability that 600 people will die
• Which of the two programs would you favor?

9
Framing Effects

• The two sets of choices are objectively
  identical.
• Changing the description of outcomes from lives
  saved to lives lost is sufficient to shift
  prototypic choice from risk-averse to
  risk-seeking behavior.

10
6. Estimation traps

• Decision calibration
• Overconfidence - if I am incompetent, I am
  probably ignorant of it.
• Lack of feedback - students may think they
  understand but fail on a test.
• Lack of confidence - learned helplessness?
• Recallability -whats in the news?

11
Problem - Overconfidence

• Lockheeds 1991 sales
• General Motors 1991 profit
• General Motors assets in 1991
• Number of deaths due to pneumonia and influenza
  in the United States in 1990
• The world population in 1990

• Instructions
• Do not look up any information on these items.
• For each, write down your best estimate of the
  quantity.
• Next, put a lower and upper bound around your
  estimate, such that you are 98 percent confident
  that your range surrounds the actual quantity

12
Solution

• Lockheeds 1991 sales
• General Motors 1991 profit
• General Motors assets in 1991
• Number of deaths due to pneumonia and influenza
  in the United States in 1990
• The world population in 1990

• 9,809,000,000
• -4,452,800,000
• 168,259,000,000
• 78,640
• 5,333,000,000

13
Overconfidence Bias

• "People generally ascribe more credibility to
  data than is warranted and hence overestimate the
  probability of success merely due to the presence
  of an abundance of data" (Sage, 1981, p. 648).
• Predictive accuracy reaches a ceiling at an early
  point in an information gathering process
• Confidence in decisions continues to climb as
  more and more information is obtained
• This bias is most extreme in tasks of great
  difficulty

14
PermutationsIn which structure are there more
paths?How many paths do you think are there in
each structure?

• (B)
• xx
• xx
• xx
• xx
• xx
• xx
• xx
• xx
• xx

• (A)
• xxxxxxxx
• xxxxxxxx
• xxxxxxxx

15
List of Names

• Margaret Thatcher
• James Eynon
• Barbara Walters
• Charles Stubbart
• Hillary Clinton
• Arlyn Melcher
• Indira Gandhi
• Jack Smith
• Madonna
• Greg White

• Instructions
• Read the list once.

16
Recall Test!

• Are there more men or women on the list?
• How many men are on the list?
• How many women are on the list?
• How confident are you of your answers? Provide a
  probability number ranging from 0 to 1 for each
  answer.

17
Recallability

• Situations in which people assess the frequency
  of a class or the probability of an event by the
  ease with which instances or occurrences can be
  brought to mind.
• People inadvertently assume that
  readily-available instances, examples or images
  represent unbiased estimates of statistical
  probabilities.

18
7. Representativeness

• All families of six children in a city were
  surveyed. In 72 families the exact order of birth
  of boys and girls was G B G B B G.
• What is your estimate of the number of families
  surveyed in which the exact order of births was
• B G B B B B?

19
Representativeness Bias

• People consistently judge the more representative
  event to be more likely, whether it is or not.
• Leads to major errors in the estimation of
  subjective probabilities
• Subjective probability denotes any estimate of
  the probability of an event, which is given by
  subjects, or inferred from their behavior.