Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 22 of 36 Frontiers of Microeconomics
Section 13 of 18
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People can be overconfident.
Imagine you were asked some numerical question about the number of African countries in the United Nations or the height of the tallest mountain in North America.
Instead of being asked for a single estimate you were asked to give a 90 percent confidence interval a range you were 90 percent confident the true number falls within.
For example, you answer “I’m 90 percent confident the tallest mountain in North America is between two and three miles high.”
When psychologists run experiments like this they find most people give too-small ranges.
The true number falls within their intervals far less than 90 percent of the time.
A conclusion is most people are too confident of their abilities.
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People give too much weight to a few vivid observations.
Imagine you are thinking about buying a brand X car.
To learn about its reliability you read a Consumer Reports survey of 1,000 owners of car X.
Then you ask a friend who owns a car X and she tells you her car is a lemon.
If you think rationally, you realize she has only increased your sample size by one.
But because your friend's story is vivid, you give it the most weight in your decision making.
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People are reluctant to change their minds.
People tend to interpret evidence to confirm their current beliefs.
In a study subjects were asked to read and evaluate a research report on whether capital punishment deters crime.
After reading the report those who initially favored the death penalty said they now were more certain in their view.
Those who initially opposed the death penalty also said they now were more certain in their view.
The two groups interpreted the same evidence in opposite ways.
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