Test 3 Regression to the mean when occurrences happen on either end of the bell curve they are likely to be closer to the average the next time they occur Regression fallacy the explanations people give when occurrences take place on either end of the bell curve and the next time they are closer to the average ex hot hands Optional stopping accepting evidence that agrees with our view while critically assessing then rejecting evidence against what we believe Social factors giving biased info because of Politeness Birds of a feather associating with people who agree with us Second hand testimony sharpened main point emphasized leveled de emphasized ignored Availability heuristic our memory is selective thinking events are more probable to the extent they are more available to our memory Fortune cookie problem not a specific prediction no experience would disconfirm no time frame Moral arguments any argument that s conclusion is about a moral issue situation Casual claim reasoning X causes Y Things to remember to know X causes Y 1 what happens when X is present 2 what happens when x is absent are conditions the same correlation isn t causation control group confounding factors a factor in the control group that might change the outcome problem of hidden data there is no control so we don t know what would happen if X was absent o randomized study relevant pop o prospective study relevant pop o retrospective study relevant pop experimental group control group experimental group significant difference in Y match confounding significant diff control group factors in Y Y group control group factors match confounding significant difference in X Sample size paradox in large enough sample extremely low probability events will happen a lot more falling outside the bell curve Law of large numbers large well chosen samples tend to be more representative of a population than smaller samples Frequency vs absolute spread Coin flipping example At 100 flips it is very likely that it will be 50 50 heads and tails but it doesn t determine the frequency of tails the number of time it must be flipped Heads Tails 15 75 5 25 40 40 55 45 Diagnostic reasoning a test that is 90 accurate base rate of 20 9 1 10 use drugs that test 9 18 Outcomes use drugs that test 1 100 don t use drugs test 9 18 don t use drugs test 81 100 1 4 5 6 Expected value 6 sided die 2 or 3 5 lose 2 any other number ProbXValue 5 6 5 6 8 6 2 6 Probability 1 6 1 6 4 6 Value 5 5 2 2 3 Utility anything we think is good 90 81 9 Sunk cost decisions should be based on FUTURE costs and benefits Staying with something because you have invested time money in it Opportunity cost the cost of not having done something else lost opportunity Spending on X you lose the benefit of having spent on Y Mental accounting valuing some dollars over others depending on the source of those Too wasteful with undervalued credit cards found gambling winnings Too conservative with overvalued inheritance retirement funds Losses gains feeling the loss of X more than the gain of X Framing effect how a problem or issue is framed described can influence a decision one makes Sunk cost fallacy using the sunk cost principle to manipulate or get something done Loss aversion trying to avoid loss because its worse than a gain o Selling winning stocks to lock in gain keeping losing stocks in hopes they will bounce back and it will be a gain Decision paralysis more choices make for harder fewer decisions Trade off contrast the quality of a choice is determined by how it contrasts with other choices a bad choice Extremeness aversion people tend to avoid choosing extremes Highlights more expensive items Trade off contrast will make people buy more expensive items Status quo bias we prefer things the way they are stick with what we re given already have Endowment effect once you own something it has more value Regret aversion the power of regret work to avoid the regret responsibility for negative outcome o Olympic winners 2nd place was the unhappiest because of regret they could have gotten 1st o Winning 100 dollars or winning 150 after someone else before you wins 1000 you are happier with the 100 because you don t regret not winning more o Paradox decision paralysis makes you not do things that you later end up regretting Number numbness ignoring small numbers illusion inflation should focus on buying power Base rate neglect insurance don t buy for low probability events Clustering illusion just because a stock beats the market for a couple years doesn t make it superior Compounding Small transactions add up Overconfidence we have too high of an opinion of ourselves our abilities Planning fallacy underestimate the time it will take to finish a project to overcome this think about similar past events Lack of preparation Lack of investigation over spending Heard investing the professionals got to the investment first and got the good deal by the time you hear about it you re buying at a high price or selling at the low price