Quizmaster, Doug Hutchinson has come up with another great quiz. This month, he demonstrates how cognitive bias can influence our perspectives and decisions.
Good luck!
Consider the following scenario:
Laura is a recent graduate of UC Berkeley where she majored in English and Environmental Studies. As a student, Laura was very concerned with social justice issues and environmental issues. She is an avid reader and a vegetarian.
Indicate which of the following cases is most probable? Which case is the least probable?
A) Laura works in the banking industry
B) Laura works as a librarian
C) Laura works as a librarian, takes yoga classes, and is a member of the Sierra Club
D) Laura works in the banking industry and is a member of the Sierra Club
Answer:
The best answer is A (Laura works in the banking industry) simply because there are many, many more people employed by banks than by libraries.
The least likely answer is probably C. The probability of a conjunction (probability of librarian AND takes yoga classes AND is member of the Sierra Club) cannot be greater than the probability of an individual component (probability of a librarian). This also means that answer A (Laura works in the banking industry) is more probable than answer D (Laura works in the banking industry and is a member of the Sierra Club).
If you chose answer D as more likely than answer A - you are likely guilty of using the representativeness heuristic. Being a member of the Sierra Club seems to be representative of our image of Laura based on her description, so we might be tempted to select the conjunction (answer D) as being more probable than the individual component (answer A) simply because we may believe she is a member of the Sierra Club. However, the probability of 2 events occurring together is always less than (or equal to) either one occurring alone. So answer D cannot be more likely than answer A.
The representativeness heuristic is a key tenet of behavioral finance. Far too often, investors let cognitive biases such as the representativeness heuristic drive their decision making rather than letting rational, unemotional thought drive their decisions.
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This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.
