1. The Representativeness Heuristic then: Risk Attitude and Framing Effects Psychology 355: Cognitive Psychology Instructor: John Miyamoto 6/1/2016: Lecture 10-3 Note: This Powerpoint presentation may contain macros that I wrote to help me create the slides. The macros aren’t needed to view the slides. You can disable or delete the macros without any change to the presentation.

2. Outline Review: The Lawyer/Engineer Problem (representativeness heuristic and base rate neglect) The conjunction fallacy ♦ The conjunction fallacy is predicted by the hypothesis that people use a representativeness heuristic. Introduction to Preference Under Risk Risk attitude (risk aversion and risk seeking) Reflection effect Framing effects: Gain frames and loss frames Mental accounting Psych 355, Miyamoto, Spr ‘16 2 Lecture probably ends here Diagram that Depicts Use of a Representativeness Heuristic

3. Psych 355, Miyamoto, Spr '16 3 Representativeness Heuristic "more representative" means "more similar to a stereotype of a class or to a typical member of a class." Representativeness Heuristic: Judge the probability of an event E by the representativeness of the event E. ♦ We need some example to make this idea more clear (see next). Event A is more representative than Event B Event A is more probable than Event B The Lawyer/Engineer Problem

4. Psych 355, Miyamoto, Spr '16 4 Lawyer/Engineer Problem (K&T, 1973) DESCRIPTION OF JACK: Jack is a 45-year-old man. He is married and has four children. He is generally conservative, careful, and ambitious. He shows no interest in political and social issues. (This description is designed to fit the stereotype of an engineer more than the stereotype of a lawyer.) 30:70 Condition: High Base Rate for Engineer If Jack's description were drawn at random from a set of 30 lawyers and 70 engineers, what would be the probability that Jack is one of the engineers? 70:30 Condition: Low Base Rate for Engineer If Jack's description were drawn at random from a set of 70 lawyers and 30 engineers, what would be the probability that Jack is one of the engineers? Findings re Lawyer/Engineer Problem

5. Psych 355, Miyamoto, Spr '16 5 Results re Lawyer/Engineer Problem Probability of "engineer" was rated to be about the same in the low and high base rate conditions. (Insensitivity to Base Rate, a.k.a. Base Rate Neglect) ♦ High base rate condition = 30:70 Condition Low base rate condition = 70:30 Condition ♦ Probability theory implies that Jack is much more likely to be an engineer in the high base rate condition than in the low base rate condition. (This is an application of Bayes' Rule - an important rule of reasoning.) Why do people ignore base rates? See next slide Why Do People Ignore Base Rates? The Representativeness Explanation High versus low base rate has no effect, even though it ought to influence the probability judgment.

6. Psych 355, Miyamoto, Spr '16 6 Why does the Representativeness Heuristic Cause Base Rate Neglect? The similarity of the particular case to the stereotype of a category influences how representative this category appears to be. Therefore similarity influences the judgment of probability. ♦ Example: Similarity of Jack to the stereotype of an engineer influences the judged likelihood that Jack is an engineer. The base rate of events is unrelated to how representative an event seems to be. Therefore base rate will not influence the judgment of probability. Example: The base rate for engineers (70:30 or 30:70) is unrelated to how representative Jack would be of the engineer category. Therefore the base rate of engineers should not influence the judged likelihood that Jack is an engineer. Event A is more representative than Event B Event A is more probable than Event B # Judgment Process for the Representativeness Heuristic

7. Psych 355, Miyamoto, Spr '16 7 Why Do People Often Ignore Base Rates? The Representativeness Heuristic: People judge probability based on the similarity of the current case to a stereotype. (a)Jack is equally similar to a typical engineer in the low and high base rate conditions. (b)People ignore the base rate because the base rate is irrelevant to the judgment of how similar Jack is to a typical engineer. ♦ Probability theory shows that the base rate is very relevant to judging the probability that Jack is an engineer. ♦ Cognitive theory shows that the base rate is often not psychologically relevant to judging the probability that Jack is an engineer. When Does It Matter Whether People Ignore Base Rates?

8. Psych 355, Miyamoto, Spr '16 8 When Does It Matter Whether People Ignore Base Rates? Evidence shows that physicians sometimes overlook base rates when attempting to diagnose a disease. Evidence suggests that investors are overly influenced by short-term information regarding the value of stocks. Business decisions tend to be overly influenced by short-term trends. Criticism of Goldstein’s Description of the Lawyer/Engineer Problem

9. Psych 355, Miyamoto, Spr '16 9 Criticism of Goldstein’s Description of the Lawyer/Engineer Problem The Goldstein description of this study is inadequate because it does not contrast the 30:70 condition with the 70:30 condition. It only mentions the 70:30 condition. The important finding is that subjects in the 30:70 and 70:30 conditions are equally confident that Jack is an engineer (subjects in the two conditions overlook the difference in the base rate). ♦ Knowing only the result for the 70:30 condition does not establish that subjects ignore base rates. ♦ See Goldstein p. 374. The Conjunction Fallacy - The Famous "Linda" Problem

10. Psych 355, Miyamoto, Spr '16 10 Conjunction Fallacies – The Famous "Linda" Problem Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. F:Judge the probability that Linda is a feminist. T:Judge the probability that Linda is a bank teller. F & T:Judge the probability that Linda is a feminist and a bank teller. Probability Theory: P(F) ≥ P(F & T), P(T) ≥ P(F & T) Typical Judgment: P(F) > P(F & T) > P(T) Why Are Conjunction Fallacies Psychologically Interesting?

11. Psych 355, Miyamoto, Spr '16 11 Why Conjunction Fallacies Are Psychologically Interesting? Conjunction fallacies strongly support the claim: Human reasoning with uncertainty is different from probability theory. ♦ Human reasoning with uncertainty is based on a various heuristics – the conjunction fallacy is caused by the use of a representativeness heuristic. Two Question Regarding Conjunction Fallacies: What is wrong with the judgment pattern: P(F) > P(F & T) > P(T)? Why do people's judgments have this pattern? Probability & the Set Inclusion Principle

12. Psych 355, Miyamoto, Spr '16 12 Probability and the Set Inclusion Principle If set B is a subset of set A, then the probability of B must be equal or less than the probability of A. B  A  P(B) < P(A) Rationale: When B occurs, A also occurs, so the probability of B cannot exceed the probability of A. A B Sample Space (set of all possibilities) Interpretation of Linda Problem in terms of Set Inclusion

13. Psych 355, Miyamoto, Spr '16 13 F:Judge the probability that Linda is a feminist. T:Judge the probability that Linda is a bank teller. F & T:Judge the probability that Linda is a feminist and a bank teller. Probability Theory: P(F) ≥ P(F & T), P(T) ≥ P(F & T) Typical Judgment: P(F) > P(F & T) > P(T) Why Do People Make Conjunction Errors? Conjunction Fallacy Sample Space F F & T T Linda Problem: Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

14. Psych 355, Miyamoto, Spr '16 14 Why Do People Make Conjunction Errors? Remember: The representativeness heuristic predicts that people judge the probability based on how similar the individual case is to a typical member (stereotype) of a group. The description of Linda sounds more similar to someone who is a feminist and a bank teller, than to someone who is only a bank teller. Criticisms of the Representativeness Explanation of Conjunction Fallacies stronger similarity Description of Linda Bank Teller Prototype Feminist Bank Teller Prototype weaker similarity

15. Psych 355, Miyamoto, Spr '16 15 Criticisms of This Interpretation Criticism: The Linda problem is just one problem. Reply: Same pattern is found with many similar problems. Criticism: Maybe people think “bank teller” means someone who is a bank teller and not a feminist. Criticism: Conjunction errors can be eliminated by stating the question in terms of frequencies instead of probabilities. Summary re Representativeness Heuristic

16. Psych 355, Miyamoto, Spr '16 16 Summary re Representativeness Heuristic There is nothing wrong with using similarity as a factor in judging a probability. ♦ The problem is that attention to similarity causes people to ignore other factors, like base rates, regression effects and set inclusion, that are also relevant to judging probability. Two Major Issues in Psych of Decision Making - Probability & Preference Bayes' Rule says: The Probability of an Event X The Base Rate of the Event X The Evidence for and against Event X Representativeness Heuristic

17. Two Major Issues in Psychology of Decision Making Judgments of likelihood ♦ What outcomes are likely? Which are unlikely? ♦ How likely? Slightly possible? Almost certain? Etc. Judgments of preference & making choices ♦ How strongly do you like or dislike different possible outcomes? ♦ How risky are difference choices? ♦ What risks are worth taking for potential gains? Psych 355, Miyamoto, Spr '16 17 We’ve been talking briefly about this topic. Next topic. Digression re Risk Attitude

18. Psych 355, Miyamoto, Spr '16 18 Risk Attitude Risk averse action: A person chooses a sure-thing X over a gamble G where X is less than the expected value of G. Example of a Risk Averse Decision Prefer a sure win of $500 over a 50-50 gamble for $1,010 or $0. (Note: Expected value of gamble = $505) Risk seeking action: A person chooses a gamble G over a sure thing X where the expected value of G is less than X. Example of a Risk Seeking Decision Prefer a 50-50 gamble for $1000 or $0 over a sure win of $505. (Note: Expected value of gamble = +$500) Examples of Risk Aversion & Risk Seeking

19. Psych 355, Miyamoto, Spr '16 19 Examples of Risk Aversion & Risk Seeking Whenever you buy insurance, you are acting in a risk averse way. The cost of car insurance is a sure loss that is a bigger loss than the expected value of the gamble of driving an uninsured car. Whenever you gamble at a professional casino or in state lottery, you are acting in a risk seeking way. ♦ The cost of the lottery ticket is greater than the expected value of the lottery ticket. ♦ In a casino, all of the mechanical gambles (roulette or slot machine) have a negative expected gamble. Is It More Rational to be Risk Averse or Risk Seeking?

20. Psych 355, Miyamoto, Spr '16 20 Is It More Rational to be Risk Averse or Risk Seeking? There is no rational requirement to be risk averse. It is equally rational to be generally risk averse or generally risk seeking. ♦ It is also rational to be risk seeking for some money quantities, e.g., small amounts of money, and risk averse for other money quantities, e.g., large amounts of money. ♦ It is also rational to be risk averse in some domains, e.g., gambles for the health of your children, and risk seeking in other domains, e.g., gambles for business profit and loss. Before the work of Kahneman & Tversky, many theorists thought that people were generally risk averse. ♦ Next slide: Reflection effect shows that people are risk averse for some kinds of gambles, and risk seeking for other types of gambles. Reflection Effect Example

21. Psych 355, Miyamoto, Spr '16 21 Reflection Effect – Example Choice 1: Which would you prefer? Option A:.80 chance to win $4,000. Option B: 1.0 chance to win $3,000. Choice 2: Which would you prefer? Option C:.80 chance to lose $4,000. Option D: 1.0 chance to lose $3,000. People are typically risk averse for gains and risk seeking for losses. This pattern is called the reflection effect. Typical preference  when gambling for gains Reflection Effect - Definition  Typical preference when gambling for losses

22. Psych 355,, Miyamoto, Spr '16 22 Wednesday, June 01, 2016 : The Lecture Ended Here