READING QUESTIONS WEEK 8
8 Psychology and economics: rational choice
Tversky and Kahneman - Judgement under uncertainty
1. According to Tversky and Kahneman “people rely on a limited number of
heuristics principles which reduce the complex tasks [of making judgments] to
simpler judgmental operations” (p. 1124). What are these heuristics, give their
names and short descriptions of them? To what kind of biases/fallacies may they
lead?
Three heuristics that are employed to asses probabilities and to predict values are:
Representativeness
Availability
Anchoring
These three heuristics are highly economical and usually effective, but they lead to
systematic and predictable errors (Kahneman, 1974).
Representativeness
In the representativeness heuristic probabilities are evaluated by the degree to which A is
representative of B (by the degree to which A resembles B). When A is highly
representative of B, the probability that A originates from B is judged higher. Whereas, if
A is not similar to B, the probability that A originates from B is judged low.
One of the fallacies this may lead to is Misconception of chance/ gambler's fallacy:
The gambler's fallacy is the mistaken belief that, if something happens more frequently
than normal during some period, it will happen less frequently in the future, or vice
versa.
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. Chance is
commonly viewed as a self-correcting process in which a deviation in one direction
induces a deviation in the opposite direction to restore the equilibrium. When a coin is
tossed 6 times people assume a distribution of 3 heads and 3 tails. However, it could be
that in this short sequence the distribution is 2:4 or even 6:0.
Another fallacy this may lead to is Base-rate fallacy:
Base rate fallacy is a formal fallacy. If presented with related base rate information (i.e.
generic, general information) and specific information (information only pertaining to a
certain case), the mind tends to ignore the former and focus on the latter. This results in
people getting the probability wrong and often choosing the least likely end result.
Availability
In the availability heuristic 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.
Availability is a useful clue for assessing frequency or probability, because instances of
large classes are usually recalled better and faster than instances of less frequent
1
8 Psychology and economics: rational choice
Tversky and Kahneman - Judgement under uncertainty
1. According to Tversky and Kahneman “people rely on a limited number of
heuristics principles which reduce the complex tasks [of making judgments] to
simpler judgmental operations” (p. 1124). What are these heuristics, give their
names and short descriptions of them? To what kind of biases/fallacies may they
lead?
Three heuristics that are employed to asses probabilities and to predict values are:
Representativeness
Availability
Anchoring
These three heuristics are highly economical and usually effective, but they lead to
systematic and predictable errors (Kahneman, 1974).
Representativeness
In the representativeness heuristic probabilities are evaluated by the degree to which A is
representative of B (by the degree to which A resembles B). When A is highly
representative of B, the probability that A originates from B is judged higher. Whereas, if
A is not similar to B, the probability that A originates from B is judged low.
One of the fallacies this may lead to is Misconception of chance/ gambler's fallacy:
The gambler's fallacy is the mistaken belief that, if something happens more frequently
than normal during some period, it will happen less frequently in the future, or vice
versa.
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. Chance is
commonly viewed as a self-correcting process in which a deviation in one direction
induces a deviation in the opposite direction to restore the equilibrium. When a coin is
tossed 6 times people assume a distribution of 3 heads and 3 tails. However, it could be
that in this short sequence the distribution is 2:4 or even 6:0.
Another fallacy this may lead to is Base-rate fallacy:
Base rate fallacy is a formal fallacy. If presented with related base rate information (i.e.
generic, general information) and specific information (information only pertaining to a
certain case), the mind tends to ignore the former and focus on the latter. This results in
people getting the probability wrong and often choosing the least likely end result.
Availability
In the availability heuristic 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.
Availability is a useful clue for assessing frequency or probability, because instances of
large classes are usually recalled better and faster than instances of less frequent
1
