Cognitive Constraints Working memory limits the number of alternatives considered. Illicit conversion: misinterpreting “All A are B” to mean “All B are A.” Belief bias: humans in diverse cultures accept conclusions as valid when they fit cultural beliefs.
Conditional Reasoning (If P, then Q) Affirming the antecedent (P) Denying the consequent (not Q) Denying the antecedent (not P) Affirming the consequent (Q)
Modus Tollens—Denying the Consequent If a card has a vowel on one side, then it has an even number on the other side. 4% turn over the 7. Catch the cheater in a social situation! beer-16, beer-21, soda-16, soda-21 If the person is drinking beer, then she is over 21. beersoda21 16
Expected Utility Theory Bet 1: Win $8 with odds 1/3 $8 X 1/3 = $2.67 Bet 2: Win $3 with odds of 5/6 $3 X 5/6 = $2.50 Expected utility greater for Bet 1, most people select Bet 2.
Subjective Utility Curve Value (subjective utility) increases slowly for gains. Implication: Further and further gains, don’t make people as happy as going from zero to a small gain.
Subjective Utility Curve Value (subjective utility) decreases rapidly for losses but then begins to level out. Implication: Initial losses are the most painful. Very heavy losses, on the other hand, are tolerated better than one might expect.
Stock Market Behavior Buyer’s regret--reference point is often lowered right after purchasing a stock, increasing the perception of risk (paid $50, but now only think it’s worth $45—a small loss). The buyer is risk averse and the small loss looks too large to keep the stock in the portfolio for long. Even a winning stock can look too risky to keep. A losing stock, on the other hand, puts one into the risk tolerant region. Losers are held too long.
Estimating Probabilities Overestimates of low frequency events (note: insurance premiums take into account this error). Underestimates of high frequency events. (note: works against those engaged in risky behavior with high probability, negative consequences).
Representativeness Heuristic Typical events of a category are seen as more probable (e.g., HTTHHT > HHHTTT). Law of small numbers—mistakenly expect small samples to mirror population statistics and the Gambler’s Fallacy. Conjunctive Fallacy: Pr (AB) > Pr (A)
Availability Heuristic Events easily retrieved from memory must be highly probable. Problem lies in factors that make events stand in memory (e.g., distinctiveness, emotional salience, frequency of encoding/retrieval).