Econ 440: Lecture 3 - Biases and Heuristics

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Questions and Answers

What does confirmation bias prevent individuals from doing?

Changing their opinions based on statistical data

Evaluating all available evidence impartially (correct)

Accepting new beliefs based on personal experiences

Recognizing the influence of their prior beliefs

In the context of Bayes' Rule, what does P(B) represent?

The probability of the belief being true after seeing the evidence

The prior belief before seeing the evidence (correct)

The probability of having evidence A

The probability of the evidence given the belief

What characterizes the strong priors of a climate denier and climate scientist in the context of Bayes' Rule?

Both exhibit biases towards confirming their beliefs

Both have probabilities of P(B) that are very close to 0 or 1 (correct)

Their beliefs about climate change are formed through identical evidence

Both have equally high probabilities for P(B)

What type of questions motivates the study of how people assess probabilities?

Questions about real-world decision-making scenarios Signup and view all the answers

According to Kahneman and Tversky's work, what is a common challenge individuals face with probabilities?

They often rely on intuition rather than data Signup and view all the answers

What does the notation $P(B|A)$ refer to in Bayes' Rule?

The probability of belief B after observing evidence A Signup and view all the answers

What is a consequence of confirmation bias on decision making?

Leads to selective exposure to information Signup and view all the answers

How might biases influence probability assessments according to behavioral economists?

They can result in irrational decision making Signup and view all the answers

What does the variable α represent in the projection bias model?

The deviation from the rational model Signup and view all the answers

In the context of overconfidence, what was a common finding about self-rating for driving safety among college students?

Majority rated themselves above 90% in safety Signup and view all the answers

Which statement accurately reflects the relationship between the rational model and the projection bias model?

Projection bias includes the rational model when α equals 0 Signup and view all the answers

What can be inferred about the self-ranking results in the experiment regarding perceived driving skill?

The majority rated their skill as being more than average Signup and view all the answers

How is the utility of consumption defined in relation to the state in projection bias?

u(c|s) varies based on whether the state is good or bad Signup and view all the answers

What was a significant shift in thinking introduced by Kahneman and Tversky regarding probability assessments?

Probability assessments rely on heuristic methods. Signup and view all the answers

Which assumption is part of von Neuman and Morgenstern's expected utility theory?

Decision-makers can accurately follow the independence axiom. Signup and view all the answers

How do Kahneman and Tversky view the subjective nature of probability assessments?

Reasonable individuals can disagree on likelihoods. Signup and view all the answers

What is the primary focus of Kahneman and Tversky's research?

Identifying decision-making heuristics. Signup and view all the answers

Which of the following describes the representativeness heuristic?

Judging the likelihood of A belonging to class B based on similarities. Signup and view all the answers

What is an example of a bias resulting from the representativeness heuristic?

Misjudging the probability of someone being an engineer based on stereotypes. Signup and view all the answers

What type of sample size was typically used in Kahneman and Tversky's experiments?

Less than 100 participants. Signup and view all the answers

What do the availability heuristics primarily rely on?

Easily recalled or accessible examples. Signup and view all the answers

How did the methods used by Kahneman and Tversky differ from traditional economic research methods?

They conducted long lists of experiments with various findings. Signup and view all the answers

What is the ratio expected between the assessments of the two treatments based on Bayes’ Rule?

2.33 Signup and view all the answers

What cognitive bias is displayed when subjects ignore base rates in probability assessments?

Base rate neglect Signup and view all the answers

When presented with Linda's case, what incorrect conclusion do most individuals tend to draw?

That being both a bank teller and an activist is more likely. Signup and view all the answers

How does the availability heuristic affect the assessment of the national divorce rate?

It leads to overestimating the rate based on personal experiences. Signup and view all the answers

In the word selection example, what is the more likely occurrence when selecting a random word?

It begins with the letter r. Signup and view all the answers

What result did KT find concerning undergraduates' responses to Linda's description?

85% thought option (b) was more probable than option (a). Signup and view all the answers

Which is NOT an example of availability bias?

Relying on census data to judge national statistics. Signup and view all the answers

What might cause subjects in the experiment with the vignette to offer a ratio close to 1 instead of 2.33?

They based responses on representativeness rather than actual probabilities. Signup and view all the answers

What is a limitation of using the availability heuristic?

It can lead to subjective and biased assessments. Signup and view all the answers

What factor appears to influence purchasing behavior for winter gear according to the findings?

Current temperature deviations Signup and view all the answers

What is the primary explanation for increased sales of convertibles during warmer weather?

Increased temperature deviates from the norm Signup and view all the answers

In the context of housing purchases, how does seasonal weather affect prices?

Homes sell for a premium in summer versus winter Signup and view all the answers

What does standard economic theory suggest about utility maximization?

The option chosen is the one with the highest utility number Signup and view all the answers

What is a potential economic consequence of purchasing behavior influenced by colder temperatures?

Higher likelihood of item returns Signup and view all the answers

According to the analysis of vehicle purchases, what effect does a snowstorm have on vehicle types sold?

Higher sales of SUVs and trucks Signup and view all the answers

What does a utility function demonstrate in economic theory?

The preference order of different options Signup and view all the answers

What is indicated by the term 'projection bias' in relation to purchasing behavior?

Overestimating future enjoyment based on current conditions Signup and view all the answers

How does temperature impact the purchase of cars according to the data analyzed?

It significantly shifts the types of cars being purchased Signup and view all the answers

What is implied about the relationship between weather and consumer behavior in the studies discussed?

Weather affects short-term purchasing decisions Signup and view all the answers

Study Notes

Biases and Heuristics

Confirmation bias involves favoring information that supports one’s existing beliefs while disregarding contradictory evidence.
Bayes’ Rule illustrates how prior beliefs (P(B)) and new evidence (P(A|B)) update beliefs (P(B|A)), leading to differing interpretations of evidence between individuals with strong prior beliefs.
Examples include climate deniers and scientists having differing views on climate change despite seeing the same evidence due to their strong priors.

Kahneman and Tversky (1974)

Probability assessments impact everyday decisions, such as forecasting inflation or job prospects.
Questions arise about how individuals assess probabilities and whether these assessments adhere to traditional probability theory.
Traditional economic research relied on the assumption that people can easily calculate probabilities, as per Bayes' Rule and expected utility theory.
Kahneman and Tversky emphasized subjective probability assessments and highlighted heuristics over classical probability methods.

Heuristics

Heuristics are simplified decision-making rules that can be rational or biased, depending on the context.
Three key heuristics identified by Kahneman and Tversky are representativeness, availability, and anchoring.

Representativeness

The representativeness heuristic judges probabilities based on how typical or representative an individual is of a category.
An experiment showed that people ignore base rates (e.g., proportion of engineers vs. lawyers) and instead rely on how representative a description matches a stereotype, leading to base rate neglect.
The Linda problem illustrated that people erroneously assess the likelihood of a more specific scenario (active feminist bank teller) as more probable than a general one (bank teller), defying probability theory.

Availability Bias

The availability heuristic assesses event probabilities based on how easily examples come to mind, which can sometimes lead to distorted perceptions.
An example demonstrated that people misjudge the likelihood of a word selection from a dictionary based on their recollection rather than actual frequency (beginning vs. third letter).
Evidence from purchasing behaviors showed effects of weather on buying habits, suggesting that current conditions distort memory recalls and decisions (e.g., increased sales of convertible cars in warm weather).

Projection Bias

Connections between abnormal weather and large purchases (cars and houses) indicate that people’s current states influence future preferences.
In a study, results indicated that warmer temperatures heightened the sale of convertibles and snowstorms influenced all-wheel-drive vehicle purchases.
A utility function describes consumer preferences, with the aim to maximize utility from different options.

Overconfidence

Overconfidence was illustrated through a study where college students inaccurately rated their driving skills and safety, with most rating themselves above average—a statistical improbability.
Possible causes for overconfidence include a reluctance to reveal weaknesses and differing interpretations of what constitutes driving proficiency.

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Description

Explore the key concepts of biases and heuristics as discussed in Econ 440. This lecture dives into the nature of confirmation bias and its implications on our understanding of evidence, particularly in relation to climate change. Gain insights into how these cognitive biases affect decision-making processes.