Heuristic Medicine
People’s estimates of unknown quantities are easily biased by initial values they consider… even when those values are obviously irrelevant!
What is the Anchoring Heuristic?
If people are averse to certain losses, why do they play the lottery?
We overweight very small probabilities.
You are waiting to hear back after a final round interview. What are you likely to do: party tonight or after you hear back? Why?
What is after you hear back – people choose options with good reasons.
A recent research analysis found investors were more likely to sell multiple stocks during late Q1/early Q2 2020 as the market dipped, when they realized losses rather than gains.
What is Integrate Losses?
People ______ their chances of getting a bag of M&Ms in which more than half are of the same color.
What is "underestimate"?
After a horrible experience at the McDonalds on Walnut Street, you tend to avoid fast food restaurants.
What is the Availability Heuristic?
We often consider gambles in isolation and we avoid taking risks that we would take if we adopted a wider time frame.
What is Myopic Loss Aversion?
You have a 20% chance to beat World #1 Novak Djokovic in tennis. Would you rather play him in a 'Best of 3 sets' ATP event or 'Best of 5 sets' Grand Slam?
Play him in a 'Best of 3 sets' ATP event – smaller sample sizes have a greater chance of unexpected outcomes.
Starbucks medium coffee is likely their best seller.
What is the Compromise Effect?
Who tends to score better on the same essay, someone with a history of high scores or someone with a history of low scores?
High scores. Anchoring Heuristic.
A fund manager at DE Shaw generated in excess of $500M in profit, significantly outperforming the S&P 500, over the past 5 years. You invest in the fund because you believe he/she will definitely outperform the S&P 500 this year!
What is the Hot Hand Fallacy?
There are three fundamental principles of Prospect Theory. Name two of them!
1. Gains and losses relative to a reference point.
2. Diminishing sensitivity to increasing gains and losses.
3. Losses hurt more than equal gains feel good (Loss Aversion)
You endure large capital losses after investing in a company with several quarters of negative growth, because you held the mistaken belief that a profitable quarter was imminent, falling victim to the Gambler's Fallacy. How can avoid the fallacy in the future?
Beware of the law of small numbers! Small samples do not have to resemble the population from which they are drawn.
Converse allows you to choose the color and design of certain shoes. Creation/personalization of your footwear makes it more difficult to abandon your cart.
What is the Endowment Effect?
Smaller sample sizes have _______ variance and _______ chance of unexpected outcomes.
Greater; Greater
3 attributes make things more likely to trigger the Availability Heuristic. Name two of them!
1. Have come to mind recently or frequently.
2. Are the focus of our attention.
3. Spring easily to mind.
Visiting your financial advisor with the goal of building wealth, but walking out with a life insurance policy instead.
What is Loss Aversion?
You are a delivery person for Uber Eats, and you just had your best day of the year thanks to the Penn v. Dartmouth football game. Hitting your daily average after just 2 hours of deliveries, what are you likely to do? Why?
You are likely to call it quits early because you have already hit your daily reference point for earnings. However, you would benefit from continuing to make deliveries.
What difference in how you view the world accounts for the gambler's fallacy versus the hot hand fallacy?
Is the world changing? If unchaining, gambler's fallacy. If changing, streaks are seen as evidence of change, and you get the hot hand fallacy.
You are being interrogated for a crime. Should you ask that the camera points at you or you and the interrogator. Why?
You and the interrogator! The availability heuristic; people overestimate the causal impact of things that are the focus of our attention.
WSJ reported M.B.A applications to the Wharton School climbed over 20% in 2020. Penn officials, wanting to continue this growth, increased funding to recruit M.B.A. candidates. This year M.B.A. applications ticked up a mere 2%, and the funding increase seemed a failure. The officials neglected __________ and fell prey to __________.
What is Regression to the Mean? What is the Fallacy of Intervention?
You're hired as a sales & marketing lead to rethink Apple's education pricing and student discounts. You decide to implement rebates as a tool to increase revenue. How should you design the rebate program to make customers happy?
Send the rebate in the mail after the purchase. Segregate gains! Integrate losses!
You are a car salesman tasked with selling Tesla's new Cybertruck. The truck is ugly, but it has very impressive acceleration and durability. Should you present it alone? Or with the other trucks? Why?
With the other trucks. You can easily evaluate appearance on its own, but you need a reference point to evaluate 0-60 times and durability.
Following Hurricane Ida, singer/songwriter Frank Ocean wanted to raise funds to lend support to families in need. His team launched a meet & greet VIP experience to help raise the money. Fans could purchase a Zoom call with Frank for $4500, an in-person meeting for $5000, or a personalized digital note for $2500. I bought the in-person meeting for $5000.
What is the Attraction Effect?
A parent read that last year Penn accepted a record-low 5.68% of applicants to the Class of 2025 but asserts that their child “will definitely get in, because he’s brilliant!” This parent has neglected _______ _______ (2 words).
What is Base Rates?