This time we discuss another story from the paper of Tversky and Kahneman – about the biases originating from our inability to make adjustments from an initial value. In other words, the initial value anchors to our head.
To illustrate this bias: the following expressions were given to two groups of high-school students to estimate in 5 seconds.
to the first group: 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8
to the second group: 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
The median estimate for the first group was 512, and that of the second was 2250 (the correct answer is 40320)!
Our Estimation of Success and Risks
Overestimation of benefits and underestimation of downsides are things we see every day. On the one hand, it was necessary for us, as a species, to make progress, yet it could seriously land in failure to deliver quality products in the end.
Conjunctive Events
Imagine, the success of a project depends on eight independent chances, each with 95% probability (almost a pass for each!). So overall, the project has (0.95)8 = 66% chance of success. Often people overestimate this as the number 0.95 gets them into a belief of surety of success. These are conjunctive events, where the outcome is a joint probability or conjunction with one other.
Disjunctive Events
A classic case of a disjunctive event is the estimation of risk. Each stage of your project has a tiny probability, about 5%, that can stop the business. What is the overall risk of failing? You know by now that you can’t multiply all those tiny numbers, instead estimate the chance not to lose in any step and then subtract it from 1. (1 – (0.95)8) = 33%. You don’t finish in one out of three cases. People underestimate risks because the starting point appears too small to be significant.
Tversky, A.; Kahneman, D., Science, 1974 (185), Issue 4157, 1124-1131
