Decision Analysis for Management Judgment, 6th Edition

10Heuristics and biases in probability assessment

Introduction

Methods designed to help managers with decisions involving risk often require estimates of probabilities. Many of these estimates will be based on judgment because of the unavailability of suitable statistical data. But how good are people at estimating probabilities? This question has been the subject of a great deal of research by psychologists, and in this chapter we will look at the results of their work.

Before proceeding, you might find it interesting to assess your own ability to estimate probabilities by answering the following quiz. We will give you the answers later in the chapter.

Test your judgment

1. In 2023, approximately what percentage of people in the United States were victims of a violent crime according to official statistics?
2. Consider the chances of a randomly selected US citizen dying as a result of the following causes (as estimated in 2023):
   1. accidental opioid overdose
   2. a fall
   3. gun assault
   4. cataclysmic storm
   5. dog attack
   6. walking down or crossing the street

   Rank these causes of death from the most to the least likely.

3. Eight percent of people interviewed for jobs at a company have a criminal record. Given below are the notes made by the interviewer on one applicant, Jim X. These notes have been randomly selected from the files of interviewed candidates.

   Jim had an unshaven, scruffy appearance. Though his clothes looked expensive, they did not fit him well. He never made eye contact during ...