Lecture 2 Judgmental Biases

Question 1

What are the two kinds of error?

Answer 1

Bias: a predictable mistake
Noise: a random error

Question 2

• A bord with all points in the center:
• A bord with all points at the left of the board:
• A bord with all points randomly over the board:
• A bord with all points randomly at the left of the bord:

Answer 2

• no bias, low noise
• bias, low noise
• no bias, high noise
• bias, high noise

Question 3

What are three beliefs of the homo economicus?

Answer 3

• Uses all relevant available information
• Cognitively processes information correctly
• Holds rational expectations

Question 4

Name 8 biases in Beliefs:

Answer 4

• Overconfidence and Optimism
• Anchoring bias
• Base rate neglect
• Gambler’s Fallacy
• Hot hand Fallacy
• Confirmation bias
• Availability biases
• Bounded awareness

Question 5

Which three biases in Beliefs are the representativeness biases?

Answer 5

Base rate Neglect
Gambler’s Fallacy
Hot Hand Fallacy

Question 6

Overconfidence

Answer 6

Bias in which subjective confidence in judgments is greater than their objective accuracy. Regardless of how much we know, we overestimate how well we know our limits.

Question 7

Optimism

Answer 7

Bias in which the likelihood of positive outcomes of actions is overestimated and the likelihood of negative outcomes is underestimated

Question 8

How does the graph looks of overconfidence?

Answer 8

Instead of a normal distribution, it is a high and small distribution

Question 9

How does the graph looks of optimism?

Answer 9

The same normal distribution, but then it is shifted to the right

Question 10

What are the three forms of overconfidence and optimism and their meaning

Answer 10

Overconfidence
- overprecision/miscalibration: (excessive confidence in one’s beliefs)
Optimism
- overestimation: (placing one’s performance better relative to actual performance)
- Overplacement: (Ranking one’s performance higher relative to others)

Question 11

Why is the awareness of estimation errors important?

Answer 11

Unawareness of estimation errors can lead to the “winner’s curse” problem when positive and negative errors have different implications

Question 12

The winner’s curse

Answer 12

The winner’s curse is a tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item.

Question 13

Hindsight bias

Answer 13

Tendency for people with outcome knowledge to believe falsely that they would have predicted the outcome

Question 14

planning fallacy

Answer 14

The planning fallacy refers to a prediction phenomenon wherein people underestimate the time it will take to complete a future task, despite knowledge that previous tasks have generally taken longer than planned

Question 15

Which two views are there?

Answer 15

• Inside view: (more natural and typically optimistic)
• Outside view: (more accurate)

Question 16

Which two characteristics do the Inside view have?

Answer 16

• Focus on specifics of the case
• Anchored on plans, impressions

Question 17

Which two characteristics do the Outside view have?

Answer 17

• the case as a member of a category
• baseline statistics as starting point

Question 18

Self-serving bias or self-attribution bias

Answer 18

Tendency to attribute successes to personal factors and failures to situational factors beyond control

Question 19

Anchoring:

Answer 19

Tendency to rely too heavily on one piece of information in evaluations

Question 20

Insufficient adjustment

Answer 20

Initial values are insufficiently adjusted; estimates are biased in the direction of initial values