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?

($ 33 )

BB 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) $82,000, translating yen into dollars. What is your guess?

($ 53 )

(Question 2 illustrates "Anchoring" by irrelevant information. The freshman's information is known to be useless, yet we use it.)

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

72%
28% (sample of doctors, not my students)

If Program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. (78%) BB 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 X is adopted, 400 people will die. If program Y is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die.

Which of the two programs would you favor?

Program X
Program Y

22%
78% (sample of doctors, not my students)

(Notice that the sure programs, X and V, lead to exactly the same number of survivors. The risky programs, Y and W, are also the same as each other. Kahneman & Tversky (1984) found that in the positively framed version AA/VW, 72% of doctors chose program V, the safe- and-sure program to save 200 people, and 28% chose program W, the risky program. A different sample of doctors was given the negatively framed version BB/XY. When framed negatively, 22% of the physicians voted for the safe-and-sure program X and 72% of them opted for the risky program Y. Different framing made the risky program more attractive.

Why did framing matter so much? Because of a second phenomenon: "Loss Aversion". People are willing to take a risk to avoid loss completely, even if they are generally risk averse. Conventional risk aversion cannot explain what is happening here, which is that people are willing to take on the possibility of a big loss in order to avoid the possibility of a small loss. It is as if there is a fixed utility cost to losing anything.

I took the numbers from "Classic Decision Puzzlers," http://www.rci.rutgers.edu/~gbc/puzz.txt, which has more questions like the ones in this test.)

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.

28 percent chose Altoona.
72 percent chose Beloit.

(Question 4 is not exactly about a fallacy, but a peculiarity. A reduction of 10% in Beloit is preferred to 15% in Altoona. That may be rational, if some fixed cost can thus be avoided. In class, change the 20 percent to 50 percent and see if students then agree that Altoona should get the filtration system.)