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Unformatted text preview: Department of Economics University of California, Berkeley GSI: Josh Tasoff Spring 2010 Econ 119 Last Updated: 4/5/10 Section Notes 4 1 Agenda 1. Announcements 2. Questions? 3. Heuristics and Biases: Quick Overview 4. Inference by the Believers in Small Numbers: Practice Problems 2 Announcements 1. To make reduction of mistakes and discovery of mistakes incentive compatible for both you and me (respectively), I will pay $5 to the first person who first brings a substantive mistake to my attention. You must be enrolled in the class to earn this money. 2. If you want a midterm regrade, you must submit your written appeal to me no later than Thursday, 4/8/10. 3 Heuristics and Biases Kahneman and Tversky launched their careers back in the 1970s (before prospect theory) with their heuristics and biases research agenda. A judgment heuristic is a mental rule that the mind uses to shortcut mental processing to get a quick answer. Because our mind uses heuristics, we can make significant mistakes when information is framed in the wrong way. For example, in perception we often judge the distance of a far away object by how sharply it can be seen. This is often a good heuristic to gage distance but on very clear days we judge distant objects to be closer than they actually are. People make analogous mistakes regarding probability assessments. 3.1 Representativeness From Kahneman and Tversky (1974), What is the probability that event A originates from process B? What is the probability that process B will generate event A? In answering such questions, people 1 Department of Economics University of California, Berkeley GSI: Josh Tasoff Spring 2010 Econ 119 Last Updated: 4/5/10 typically rely on the representativeness heuristic, in which probabilities are evaluated by the degree to which A is representative of B, that is, by the degree to which A resembles B. For example, when A is highly representative of B, the probability that A originates from B is judged to be high. On the other hand, if A is not similar to B, the probability that A originates from B is judged to be low. Heres an example. Suppose you flip a fair coin six times. Which sequence do you believe to be more likely?...
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