26 March 2007
Eric Rasmusen
Erasmuse@indiana.edu

A Thinking Test

This test illustrates some common flaws in the way people think. Most of the questions are adapted from notes of Professor Michael Metzger, of Indiana University's Dept. of Business Law. I have modified them quite a bit.

AA 1. Here are some reasons why a car might not start in the morning. For each of them, assign percentage probabilities to the best of your knowledge:

(a) Insufficient battery charge:
(b) Defective fuel system:
(c) Engine problems:
(d) All other problems:

AA 2. A newly hired engineer for a computer firm in the Osaka area has four years of experience and good all-round qualifications. When asked to estimate the starting salary for this person, a freshman in high school said (admitting that he knew nothing about the industry) $23,000, translating yen into dollars. What is your guess?

AA 3. Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If program V is adopted, 200 people will be saved. If program W is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved.

Which of the two programs would you favor?

Program V
Program W

AABB 4. Your company has factories in Altoona and Beloit. Your capital budget this year allows you to invest in a filtration system in just one of these two cities. You would like to reduce cancer incidence among your workers, not because you fear legal liability (it is too hard to prove) but because you care about your workers (and you want to reduce health insurance costs). Circle your choice.

Altoona. There's a 20 percent chance that the chemicals in this plant might be causing 10 cancer cases per year among your workers. The filtration system would reduce this to a 5 percent chance.

Beloit. There's a 10 percent chance that the chemicals in this plant might be causing 10 cancer cases per year among your workers. The filtration system would entirely eliminate this risk.

AA 5. As a hurricane approaches Florida, there is a shortage of gasoline- powered electrical generators. Smith's Hardware had been selling them at list price before, but now Smith sells them at $200 above list price. Is this ethical?

YES
NO

AA 6. A public opinion poll asks you the question, "Are you happy paying an extra $50 per year in higher prices to subsidize the dairy industry?"

YES
NO

AABB 7. How would you evaluate your safety and skill as a driver?

BOTTOM QUARTER OF THE POPULATION
25th-50th PERCENTILE OF THE POPULATION
50-75th PERCENTILE OF THE POPULATION
75th-100 PERCENTILE OF THE POPULATION

AA 8. Your company had to decide whether to market one of two new potential products. The available marketing research data, which was generated at a university and is freely available to the public, indicated that Product A had a 50 percent chance of succeeding, while Product B had a 60 percent chance. In both cases, if the product had succeeded, the company would earn $7 million in profits, but if it failed, the company would merely break even.

Your company's CEO chose to market Product B, and it fails. Your main competitor chose A, and it succeeded. On a scale from 1 (fire him) to 7 (give him a bonus), what should the Board of Directors do about the CEO?

  1   2   3   4   5   6  7
AABB 9. A fair coin will be flipped four times. You can take one (and only one) of the following three bets on the sequence of heads and tails, putting up 1 dollar of your money and winning the amount indicated if your sequence turns up when the coin is actually tossed.

(a) 1. Heads. 2. Heads. 3. Heads. 4. Heads. You get $.49 if you win.
(b) 1. Heads. 2. Heads. 3. Heads. 4. Tails. You get $.48 if you win.
(c) 1. Heads. 2. Tails. 3. Heads. 4. Tails. You get $.47 if you win.
(d) You may refuse all three bets and keep your dollar.