Monday, 8 September 2008

Heuristic-driven biases: 5. Innumeracy

5. Innumeracy

People have difficulty with numbers.

Trouble with numbers is reflected in the folowing:

People confuse between "nominal" changes (greater or lesser numbers of actual dollars) and "real" changes (greater or lesser purchasing power). Economists call this "money illusion".

People have difficulty in figuring out the "true" probabilities. Put differently, the odds are that they don't know what the odds are. To illustrate this point, consider an example. In a lottery in which six numbers are selected out of fifty, what are the chances that the six numbers will be 1, 2, 3, 4, 5, and 6? Most people think that such an outcome is virtually impossible. The reality, of course, is that the probabiliy of selecting 1 through 6 is the same as the probability of selecting any six numbers.

People tend to pay more attention to big numbers and give less weight to small figures.

People estimate the likelihood of an event on the basis of how vivid the past examples are and not on the basis of how frequently the event has actually occurred.

People tend to ignore the "base rate" which represents the normal experience and go more by the "case rate", which reflects the most recent experience.

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