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Understanding Cognitive Bias in Reasoning and Decision-Making: Tversky & Kahneman Insights

This chapter explores cognitive processes in reasoning and decision-making, highlighting how biases affect people's probability estimates. Tversky and Kahneman's research demonstrates that the availability of examples influences judgment, illustrated by the gambler’s fallacy and illusory correlations. It also discusses utility theory and the impact of framing effects on choices, showing that subjective utility curves shape decision-making. Understanding these concepts can enhance our awareness of how cognitive biases can distort our perceptions of chance, luck, and the outcomes of our decisions.

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Understanding Cognitive Bias in Reasoning and Decision-Making: Tversky & Kahneman Insights

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Presentation Transcript

  1. Cognitive ProcessesPSY 334 Chapter 10 – Reasoning & Decision-Making

  2. Judgments of Probability • People can be biased in their estimates when they depend upon memory. • Tversky & Kahneman – differential availability of examples. • Proportion of words beginning with k vs words with k in 3rd position (3 x as many). • Sequences of coin tosses – HTHTTH just as likely as HHHHHH.

  3. Gambler’s Fallacy • The idea that over a period of time things will even out. • Fallacy -- If something has not occurred in a while, then it is more likely due to the “law of averages.” • People lose more because they expect their luck to turn after a string of losses. • Dice do not know or care what happened before.

  4. Chance, Luck & Superstition • We tend to see more structure than may exist: • Avoidance of chance as an explanation • Conspiracy theories • Illusory correlation – distinctive pairings are more accessible to memory. • Results of studies are expressed as probabilities. • The “person who” is frequently more convincing than a statistical result.

  5. Decision Making • Choices made based on estimates of probability. • Described as “gambles.” • Which would you choose? • $400 with a 100% certainty • $1000 with a 50% certainty

  6. Utility Theory • Prescriptive norm – people should choose the gamble with the highest expected value. • Expected value = value x probability. • Which would you choose? • A -- $8 with a 1/3 probability • B -- $3 with a 5/6 probability • Most subjects choose B

  7. Subjective Utility • The utility function is not linear but curved. • It takes more than a doubling of a bet to double its utility ($8 not $6 is double $3). • The function is steeper in the loss region than in gains: • A – Gain or lose $10 with .5 probability • B -- Lose nothing with certainty • People pick B

  8. Framing Effects • Behavior depends on where you are on the subjective utility curve. • A $5 discount means more when it is a higher percentage of the price. • $15 vs $10 is worth more than $125 vs $120. • People prefer bets that describe saving vs losing, even when the probabilities are the same.

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