Choice Under Uncertainty

We use heuristics – rules of thumb – to make judgments. These can lead to certain predictable biases.

These can lead to certain predictable biases. For instance, we classify situations based on their representativeness. We judge the frequency of events based on the availability of examples in our minds. We interpret problems based on how they are framed. These heuristics have important implications for individuals and society as a whole.

Here are some common heuristics and how they can lead us astray.

Insensitivity to Base Rates

In statistics, a base rate is how probable something is in the absence of other information.

When we receive information about the base rate of something, followed by some additional information, we tend to ignore the former. We disregard the base rate in favor of irrelevant information. For instance, if you tell study participants that 70% of the people in a room are lawyers and the rest are engineers, then ask them to guess the profession of a random, simply described person. People will guess they are a lawyer only half of the time, even though the probability is 70%.

Insensitivity to Sample Size

A sample size is the number of things observed in a statistical study, such as the number of people who answer a survey. 

We often misjudge probabilities when we fail to consider the influence of sample size. For example, if you ask people to estimate the probability that more than 60% of the babies born in a hospital during a given week are male, people do not adjust their estimates based on the total number of babies. This is despite the fact that a percentage above 50% is more likely in smaller samples due to randomness.

Availability

The ‘availability’ of something refers to how easily it comes to mind. We tend to think things which are more available are more common than those which are harder to recall.

In one experiment, subjects heard a list of names of both male and female people. They were then asked to judge whether there were more men or women named. In one list, the men were more famous, in the other the women were. Participants judged that there were more men when the names were famous and vice versa. The names were more available in their minds.

Framing and Loss Aversion

The way in which an uncertain possibility is presented may have a substantial effect on how people respond to it. When asked whether they would choose surgery in a hypothetical medical emergency, many more people said that they would when the chance of survival was given as 80 percent than when the chance of death was given as 20 percent.

Source: Decision Making and Problem Solving, Herbert A. Simon