Most of us would agree that being killed by a falling jet engine is an extremely unlikely, freak occurrence. But according to Newsweek, we are 30 times more likely to be killed by falling airplane parts than by sharks. The reasons we tend to err in answering this question is one of the important issues that are addressed in this book. Understanding the psychology of how – and how well – we make decisions can have a significant impact on how we live our lives.

Even for something as simple as buying a book we can engage in a series of quite complex thought processes: noting the attributes of different alternatives, comparing different alternatives by making ‘trade-offs’ on these attributes, and deciding how to allocate our limited resources. These processes can be investigated in systematic ways to discover what leads us to make the decisions we do, how we should make decisions given the preferences we have, and why our decision making sometimes goes awry.

What is our approach and the plan of this book?

This book provides a novel perspective on judgment and decision making along with an accessible review and integration of many of the key research findings. We argue that many of the well-documented errors or biases of judgment often occur in one-shot decision situations where we don’t have the chance to learn adequately about the environment. Focusing on these situations based on ‘heuristics and biases’ approaches can be a fruitful research strategy. But the downside of this approach is that it can lead to an overly pessimistic view of human judgment and decision making. Our perspective aims to reclaim the original reason for emphasizing errors, namely that errors can be thought of as quirks akin to visual illusions. They arise in a system which is in general extremely accurate in its functioning.

In general, using the ease-of-recall or ‘availability’ heuristic will serve us well, but in certain situations, particularly when we are insensitive to the distribution of information in the environment, we make errors. One of the key messages of our approach is that being given the opportunity to learn about information in the environment through repetition and feedback often gives rise to exceptionally accurate judgments and decisions.

This book can be read as a whole or if you have interests, the chapters are self-contained enough to enable you to dip in and choose. Our aims are twofold: to introduce you to this field, and help you improve your own decision-making skills.

To introduce many of the relevant concepts, in this first chapter we consider three important decisions that we might face during our lives: (1) which medical treatment should I choose, (2) is this person guilty or innocent, and (3) how should I invest my money?

Which medical treatment should I choose?

Martin and Simon have both been diagnosed with lung cancer but are in relatively early stages to respond to treatment. They go to see their separate doctors and are given information about radiation therapy and surgery. The difference between the information given by the two doctors is that Martin’s doctor framed the information in terms of mortality, how many people will die from the two treatments, whereas Simon’s doctor framed the information in terms of how many people will survive. A simple change in framing of information can have a large impact on the decisions we make. McNeil et al. (1982) found that across groups of patients, students, and doctors, on average radiation therapy was preferred to surgery 42% of the time when the negative mortality frame was used but only 25% of the time when the positive survival frame was used.

Positive versus negative framing is not the only type of framing that can affect decisions about medical treatments. The largest framing effects were evident when relative as opposed to absolute risk information was presented to patients. Relative and absolute risks are two ways of conveying information about the efficacy of a treatment, but they are not logically equivalent. Several studies have found much higher percentages of patients assenting to treatment when relative as opposed to absolute risk reductions are presented.

Skolbekken (1998) advocates an approach to convey information about medical treatment in a way which avoids using ‘value laden’ words like risk or chance, and carefully explaining the absolute rather than relative risks.

Is this person guilty or innocent?

The way in which juries arrive at their decisions has been the topic of much research. Here we focus on one aspect: the impact of scientific, especially DNA, evidence on jurors’ decisions about the guilt or innocence of defendants. Faced with DNA evidence in a criminal trial many jurors tend to think ‘science does not lie’; and appear to be susceptible to ‘white coat syndrome’, an unquestioning belief in the power of science, which generates a misplaced confidence and leads to DNA evidence being regarded as infallible (Goodman-Delahunty & Newell, 2004).

Is it simply because we have so much trust in science that DNA evidence is so compelling, or are there other reasons? It’s not only the fact that DNA evidence is grounded in the scientific method that makes it appear more objective and foolproof, but also the way DNA evidence is presented – the probabilities cited by the DNA experts – that makes this evidence so influential and persuasive to jurors.

What does a random match probability (RMP) of 1 in 43 trillion mean? People often interpret the probability not simply as the likelihood that a randomly chosen other person will have the same DNA as what is found in evidence (the correct interpretation), but as the probability that the defendant was not guilty (an incorrect interpretation). The leap from a ‘match probability’ to an inference about the guilt of the defendant is called the ‘prosecutor’s fallacy’. Recent research now examines the extent to which jurors understand the match probabilities that are often presented in trials.

The human error rate – DNA laboratory error rate – is the number that really matters. Even if there is only a 1 in 43 trillion probability of a random match, if the lab conducting the analysis makes errors of the order of one in a hundred or a thousand samples, then the random match probability is essentially irrelevant. Jurors don’t know this and can as a result make flawed judgements about the probative value or weight to accord to DNA evidence.

There are ways of portraying information to jurors that can improve the decisions they make. For example, presenting DNA evidence in natural frequency formats (e.g., 1 in 1,000,000 rather than probability formats, e.g. 0.0001%). Jurors’ decisions can be strongly influenced by variations in the presentation of scientific evidence.

How should I invest my money?

Imagine you just won the lottery, and you now have to decide the best way to invest it. You may consider putting money in the stock market. The problem you face is how to ‘beat’ the notoriously unpredictable stock market. The Efficient Markets Hypothesis claims that players in the financial market are well informed, greedy, and smart and therefore it’s impossible to make money for nothing in the long-term. However, Borges et al. (1999) claim that ‘recognition-based’ investment decisions can lead to much higher returns than from stocks selected by financial experts (invest in companies you recognize).

However, this heuristic is only useful for people who recognize some but not all (or none) of a given set of stocks. You need what Ortmann et al. (2008) describe as a ‘beneficial degree of ignorance’. It may not be only in the financial domain that ignorance can be good for you, but this will be elaborated on in Chapter 3.

In the case of saving for retirement, many investors use a ‘1/n strategy’ in which they divide contributions evenly across the funds offered in the plan. The ‘1/n strategy’ is a special case of a more general choice heuristic described as the ‘diversification heuristic’. The idea is that when people are asked to make several choices simultaneously, they tend to diversify rather than selecting the same item several time. However, Benartzi and Thaler (2001) conclude that using a diversification heuristic can produce a reasonable portfolio but does not assure sensible or coherent decision making.

Overview

These examples drawn from the medical, legal, and financial arenas show that our decisions can be influenced by the way in which information is provided. Subtle differences affect the decisions we make – often in ways we are completely unaware of. The aim of this book is to illustrate the breadth of situations in which understanding how we make decisions is relevant.