Biases in Reasoning (2)

CGE14411
Lecture 12

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Intended Learning Outcomes
 After the lecture, you should be able to
 Explain some major cognitive biases in
human reasoning
 Beware of ( 謹防 ) these biases in everyday
life

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Cognitive Biases in this Lecture
 #30 Anchoring
 #42 Framing
 #36 Fundamental attribution error
 #45 Self-serving bias
 #14 Hindsight bias
 #20 Outcome bias

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30. Anchoring
 Missouri River is the
longest river in the
US. Is it above or
below 50,000 Km?
 Write down your
estimate of Missouri
River.

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30. Anchoring
 Anchoring bias or anchoring effect:
people have a tendency to rely too
heavily on the very first piece of
information they are exposed to, which
can have a serious impact on the
decision they end up making

Initial Final
information decision

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 Write down the last digits of your phone
number.
 How many member states the EU has?

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 8x7x6x5x4x3x2x1=?
 Human subjects on average guessed
about 2250.
 1x2x3x4x5x6x7x8=?
 Human subjects on average guessed
about 512.
 Why do people give different answers to
the same question?
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 Recommended retail price

The suggested retail prices

HK$5,850

When a shop sells the

phone at HK$4,450,
you would consider it
_________
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 The listing price is essentially the opening offer
( 開價 ) in a negotiation ( 議價 )
 It is the point around which future bargaining
is anchored (i.e., set as a base for future
bargaining)
 A price lower than the initial price is considered “low”

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If the label on a No one buying
Everyone dying
product has a price to buy

tag with an original

price crossed out,
customers may
think they are
getting a bargain if
they accept the $150 $1,500
original price on 70% off
the tag as an
$450
anchor.
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  The number a person sees affects
his/her decision making

No limit
Quantity
Limit as an
anchor
Limit 12
cans per
customer
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 Critical Thinking
 Our intuitions about what prices are
reasonable to pay often come from some
arbitrary anchor.
 Take a minute to think when you’re given an
anchor.
 Consider whether you drop your anchor too
high and try to think of a very different
number without taking the anchor into
account.

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42. Framing
 People react to a particular choice in
different ways depending on how it is
presented, e.g. as a loss or as a gain

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Psychologists ask people: 600 caught a deadly
disease. Which option to treat the disease would
you prefer?
Framing Treatment A Treatment B
"A 33% chance of saving all
Positive "Saves 200 lives" 600 people, 66% possibility
of saving no one."
72% 28%

"A 33% chance that no

people will die, 66%
Negative "400 people will die"
probability that all 600 will
22% die." 78%
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 Researchers asked people: which is
healthier?

99% fat free 1% fat

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About how About how About how About how
fast were the fast were the fast were the fast were the
cars going cars going cars going cars going
when they when they hit when they when they
contacted each other? bumped into smashed each
each other? each other? other?

 Even though all of the participants saw the

same film, the wording of the questions
affected their answers.
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 Statistics can be presented in absolute
or relative terms, and readers would
respond very differently

Last year This year

2 out of 100 3 out of 100
students got students got
admitted in admitted in
universities universities

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• In absolute terms, the • In relative terms, the
increase was by 1% over increase was by 50% over
the year the year
• (from 2% to 3%) • (3% - 2%) / 2% = 50%

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 When considering statistics, try to
convert the figures into
positive/negative terms, and evaluate
the situation again
 When being presented with figures, see
if the improvement is still impressive
when it is presented in absolute terms

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#36 Fundamental Attribution Error
(FAE)
 Attribution ( 歸因 ) means “believing that
something is the result of a particular thing”
 When we see someone doing something, we
tend to think it is due to the person’s
personality rather than the situation the
person might be in.
 In other words, we overestimate the role of
traits and underestimate the importance of
situations when explaining someone’s
behavior.
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Why do you think the Why do you think the hotel
lady behind the pregnant staff here are so rude and
woman did not give up impolite?
her seat?

Most of us tend to think people’s behavior is to a large extent

caused by personal traits such as “selfishness” or “rudeness” etc.

In other words, we explain people’s behavior solely based on

their personality factors, and to underestimate the influence of
circumstantial factors.
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 When someone does not reply
your WhatsApp messages and
your immediate reaction is
“She is unbelievably
inconsiderate and I should
have dropped her as a friend.”

Remind yourself that it could

be that your FAE is at play.
When someone cuts in front of
you in line and your immediate
reaction is “This person is
completely uncivilized and so
selfish.”

Remind yourself that it could

be that your FAE is at play.

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 When you think someone is bad-intentioned,
they may be in fact accidental. 
 When you judge somebody doing bad things to
you, remind yourself that we should not put
too much weight to the person’s character and
not enough weight to the circumstances in
which they acted.

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#45 Self-Serving Bias
 This refers to the tendency that people
attribute their own successes to internal
characteristics and blaming failures on outside
forces
 Or, we attribute success to ourselves and
failures to external factors

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 If you failed, this same
If you get A in an bias will cause you to
exam, the self-serving believe that it was because
bias will lead you to the teacher didn't explain
believe that it's the subject correctly, the
because you studied instruction was not clear,
hard. or the assignment was too
difficult.
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If you make a profit, If you lose, you blame
you think because you the market, bad luck,
were smart. or the useless
investment adviser

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 No, the green light was
You jumped the red for my lane.
light. I’ll call the police.

After a car accident, people tend to blame

others for their careless driving

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You said you’d be there No. I said 8:30 pm.
by 8:00 pm When I said so, you’re
just absent-minded.

In a quarrel, people tend to blame the partner for

having done something wrong.
Self-serving bias affects our perception and
memory.
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 In many cases, this cognitive bias allows
people to feel good about themselves
 By blaming outside forces for failures,
people protect their self-esteem and
absolve themselves from personal
responsibility
 But it also leads to arrogance and
interpersonal difficulties

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 Critical thinking
 When you hear some people give you an
account of their conflicts, bear in mind that
this is their own version of the stories, which
are subject to self-serving bias
 For your own success stories or
interpersonal problems, bear in mind that
you may also have distorted the story to
protect yourself

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#14 Hindsight bias
 Hindsight bias (also known as knew-it-
all-along effect) means the tendency to
overestimate our ability to have
predicted an outcome that could not
possibly been predicted.

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 Misremembering
earlier judgements
or opinions are just
wild guesses

Hindsight bias

I could have
foreseen something
taking place

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You sent out 20 job
applications and you think you
have a good shot at getting at
least 8 to 10 invitations to
interview, even though deep
down you doesn’t believe it.
Finally, you get 15 invitations
to interview. You say to your
best friend: I predicted it. I
knew I’d get at least 10
invitations to interview.
Because my profile is so
outstanding!

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 When you see a
couple break up, you
may tend to think “I
know they would go
wrong”

When a team lost a

game, fans can easily
comment that the
coach or the players
made the wrong
decision
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 Hindsight bias makes us believe we are
better predictors than we actually are,
causing us to be over-confident and
consequently to take too much risk

After the number is known,

you think you could guess
the correct number.
In the next bet, you become
over-confident and make a
heavy bet

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#20 Outcome Bias
 We tend to evaluate
decisions by its
eventual result
instead of judging it
based on the quality
of the decision at
the time it was
made.

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 Imagine two car
accidents, both of which
are caused by drunk
driving.
 Accident A: 2 light
injured.
 Accident B: 2 dead & 10
serious injured.
 Who is the worst driver?
Drunk driver A or drunk
driver B?
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 A B C
The three surgeons
performed an operation
5 times, which has a
20% probability of
1 died patient dying.
0 died
2 died Who is the best surgeon?

Most people rated A the best, B the second best, and C the
worst.

You make the judgement based on the outcome.

However, a good surgeon should be assessed based on the

process.
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Who is the worst agent?
Daisy
Robert

Insurance agents Robert and Daisy both failed to inform

the customer of the exclusions in an insurance contract

Robert’s clients suffered from an accident,

and their claims were rejected.
Daisy’s clients did not have problems and
did not make a claim.

Who is the worst agent? Robert or Daisy?

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 Critical Thinking
 Do not judge a decision purely by its results,
especially when “chance” and
“uncontrollable factors” affect the outcome
 Do not evaluate the performance of a
person purely by its result. Take into
account “chance” factors and the nature of
the tasks.

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 Conclusion
 Remember to do the required readings
 The materials will be assessed in the final
examination.

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