04 risk identification and assessment: Human judgement

Question 1

What is Overconfidence?
(what are the 3 variants?)

Answer 1

Overestimation:
Upward-biased mean

Overplacement:
– Upward-biased rank

Overprecision:
– “Downward-biased variance”

Question 2

What is overestimation?

Answer 2

Overestimation:
– 88% said pro. of at least 70% that their business survives (statistics show actual survival is 25%)

– Upward-biased mean –>refers to a tendency to overstate or overestimate one’s abilities

Question 3

What is overplacement?
(Overconfidence)

Answer 3

Overplacement:
– 82% of surveyed car drivers state that they belong to the best 30% of all car drivers

– Upward-biased rank –>perceive on abillities as superior compared to their peers or colleagues

Question 4

What is overprecision?
(Overconfidence)

Answer 4

Overprecision:
– Undergrad students who indicated that they were 100% certain that their answers would be right, were on average correct 70-80% of the time

– “Downward-biased variance” –> refers to the tendency of individuals to underestimate the variability associated with their judgments or prediction

Question 5

Overestimations: low and high frequency eevents?

Answer 5

Humans show a basic pattern in “fre uency of occurrence”-estimation situations:

• Overestimation of low frequency events
• Underestimationof high frequency events

Question 6

What is bounded rationality?

Answer 6

bounded rationality:
–>reality: assumption underlying the ratiolistic paradigm of economis are usually violated

• People try to act rationally, but their rationality is limited
• People can only be rational within limits such as time and cognitive capability

Question 7

What is a bias?

Answer 7

A bias is a systematic pattern of deviation between actual human behavior and rational behavior.

—>It results from non-objective/ irrational considerations of judgment or decision-making situations

Question 8

What are the two systems differentiated by Kahneman?

Answer 8

• System 1: is the brain’s fast, automatic, intuitive, almost effortless mode
• System 2 the mind’s slower, analytical, e plicit mode, where reason dominates

Question 9

Taking bounded rationality into the risk identifaction and assesment:
What is the sitatuion in supply risk mgmt?

Answer 9

• we do not have complete access to all information to assess exposures and probabilities
• Available information is often ambiguous and uncertain
• We do not know dependence structures
• Our cognitive capability is limited

Question 10

What is the result of having bounded rationality in risk identification and assessment?

Answer 10

we simplify the judgement:

• Mental shortcuts used by the brain to make quicker decisions and judgments
• Allow judgment in cases where specific and accurate solutions are either unknown or unknowable

Question 11

What do people use for mental shortcuts?

Answer 11

People rely on mental shortcuts to simplify and evaluate complex issues

–>Heuristics are often used:

Question 12

What are heuristics?

Answer 12

• Heuristics are simple, “hard-wired” mental shortcuts or “rules of thumb”
• They facilitate quick judgments or decision-making in situations with incomplete information
• Most of the time, heuristics are highly functional,efficient, and serve us well
• But, heuristics can also be severe generators of biases

Question 13

What is the availability heuristic? (On what does availability depend)

Answer 13

” It i can think of it, it must be important”

• Judgments are affected by the availability heuristic:
• People base their judgment of the frequency of an event on how easily an example can be brought to mind

Availability in memory depends:
- number of examples found in memory
– Selectivity of exposure (media)
– How much the event stands out

Question 14

What is the main problem with availability heuristic?

Answer 14

Problem is that sometimes what is easiest to recall from memory is not typical of the overall picture, leading to faulty judgments

Question 15

What is the “anchoring and adjustment heuristic”?

Answer 15

Is the difficulty people have in adjusting an initial belief

Using a rough estimation as a starting point and then adjusting this estimate to take into account unique characteristics of the current situation

Question 16

What is “hindsight bias”? (What are the consequences?)

Answer 16

Things that were not seen or understood at the time of the accident seem obvious in retrospect

Easy to arrive at a simple solution or to blame an individual, but difficult to determine what really went wrong

Question 17

Hindsight bias: Outcome process known/unknown

Answer 17

If outcome of a process is known…
- … probability for that outcome is overestimated
- … those paths leading to the outcome become more salient, others are becoming less salient
- … information which is not compatible with outcome is ignored or de-evaluated

If outcome is not known: more possibilities are considered

Question 18

What is representativeness heuristic?

Answer 18

People tend to judge the probability of an event by evaluating how representative that event is of a larger population of events from which it was drawn

–>Over-reliance on similarities to the larger population and on the salient features of an event, but insufficient regard to other factors

Question 19

What does bayes have to do wiith the representativeness heuristic?

Answer 19

• The bayes rate neglect explaons how humans misperceive the witness statement (I.e the witness guesses the color right in 80% of the cases)

Question 20

What are recommendations for dealing wtih deas biases and heuristics?

Answer 20

Awareness: Always be alert to the possibility of your own and of others’ biases and try to dentify the implicit assumptions

Avoid framing and anchoring when asking for judgments:
– Frame issues in neutral terms
– Avoid using leading questions

Be willing to make significant adjustments to your initial assumptions: “Our beliefs are not automatically updated by the best evidence available.

Seek information/ opinions from various sources to widen frame of reference

Don’t confuse luck with skills: People think they are smart if they perform well, and
merely unlucky when they perform poor.

Often, frugal representations and response mechanisms are more tractable and plausible and avoid the use of heuristics

Question 21

When is judgmental bias present in diagnostics?

Answer 21

Judgemental bias is present decisions which are:

— made by experts
— made frequently
— extremely important

Question 22

Availability heuristic on what does the availability in memory depend upon?

Answer 22

Availability in memory depends:
- number of examples found in memory
– Selectivity of exposure (media)
– How much the event stands out

Question 23

What is the “goal of risk assessment”?

Answer 23

goal is to characterize the impact and probability for each risk identified

Question 24

Why do “people make predictable judgmental erros=

Answer 24

do judgmental errors because they

• overuse heuristics, particularly in complex judgement situations
• where specific and accurate soluations are either unknown or unknownable

Question 25

How can negative consequences of biases be mitigated?

Answer 25

negative consequences can be mitigated by

• training
• by challenging the importance of judgements,
• challenging the information bias
• and generated judgements