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MIS 4500 (31)
Lecture 7

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Management Info. Systems
MIS 4500
Pourang Irani

Lecture 7: Heuristic-Driven Bias: The First Theme: I. Heuristic-Driven Bias: 4 elements a. People develop general principles as they find things out for themselves b. They rely on heuristics, rules of thumb, to draw inferences from the info at their disposal c. People are susceptible to particular errors b/c the heuristics they use are imperfect d. People actually commit errors in particular situations  Availability Heuristic: back-of-the envelope calculation based on readily available info  Representativeness: to view something as a stereo type and make predictions therefrom i. Regression to the mean – counter to representativeness; ii. Gambler’s Fallacy – to predict the outcome of an independently probable event as a dependently probable event to fit the aggregate probability distribution;  the law of large numbers does not apply to a small sample.  Overconfidence: setting too narrow of confidence bands; get surprised frequently  Anchoring-and-Adjustment: to be influenced by and toward the past observation or a number you’re working from i. Underreact: when you don’t know how to incorporate the new information, you stay with your past belief  Aversion to Ambiguity: fear of the unknown; proclivity to choose 100% probably $1k over 50% probably $2k and 50% probably $0. Such heuristics influence: analysts’ earnings forecasts, investors’ evaluation of mutual fund performance, corporate takeover decisions and the type of portfolios selected by both individual and institutional investors. Other heuristics: excessive optimism, illusion of validity, hindsight bias, illusion of control and self-attribution error. Reading 8: Frame Dependence: the Second Theme Frame: form used to describe a decision problem; traditionally (incorrectly) assumed to be transparent Frame dependence: equivalent frames may be opaque causin
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