Posted on February 8, 2008
Filed Under Decision Making |
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 antinuclear demonstrations.
Based on this description, which of the following is more likely to be true?
a) Linda is a bank teller
b) Linda is a bank teller and is active in the feminist movement
This description and question were given to subjects as part of a study by Amos Tversky and Daniel Kahneman. The correct answer is A, because anytime you add detail to a scenario, the probability will decrease (in other words, B is a subset of A). Surprisingly, in the study, 90% of subjects chose B as the more likely alternative.
The study highlights a problem in decision making called the Representative Bias and it points out the dangers of scenario analysis in business. When analyzing possible outcomes from strategic decision making, you must be careful to assign probabilities based on probability theory, not on how well the underlying information represents the class of phenomena you are considering. In other words, detailed scenarios sometimes “feel” more likely than they really are. Thus more time is spent worrying about those risks and consequences than is spent on other scenarios.
In general, more information is a good thing. But in certain instances too much information can cause you to make worse decisions because of the representative bias, or because you are simply listening to random noise. Like all cognitive biases, awareness of the potential bias and a sound decision making process are the best defenses.