Are Judgmental Forecasts Are Psychological Biases?

Two phenomena- hindsight bias and judgmental overconfidence- illustrate why we can’t rely solely on intuition and common sense.

C. (1988). Outcome bias in decision evaluation. Journal of Personality and Social Psychology, 54, 569-579.

My topic is about the role of hindsight bias in real life. It is important to know how hindsight bias affects people’s life, especially people’s cognition.

Consider an example of a very hungry shopper (forgot to have lunch) went to the grocery store to d his weekly shopping. If his present state of hunger provokes him to buy a large dinner portion for consumption on the day later in the week when he will eat lunch in his office, then he had made an error in predicting the future outcome that has led to a bad choice. His outcome was labelled as ‘projection bias’ since the shopper was projecting his current mental state onto a future one. The projection bias entails violation of utility maximization.

A heuristic is a mental process that is used to solve a specific problem. It is informal, intuitive and quick algorithm which brain uses to develop an estimate answer in response to a reasoning question. Mostly, heuristic is helpful because they permit to quickly make sense of a complex environment bur sometimes it is failing to correctly assess the world. When heuristics failed to develop a correct judgement, it sometimes results into cognitive bias. Bias is a tendency to draw an incorrect conclusion. The mismatch in our judgement and reality is the result of a bias. The heuristics are mainly used in the reasoning. The bias that heuristics can develop reflect the constraints of a reasoning system.

There is a memory distortion form of hindsight bias where people are asked to make a judgment about an event, receive the correct results for said event, and when asked to recall their initial judgment, it is more similar to the actual outcome than to their original judgment (Calvillo, 2014). Favorability is another factor that influences whether or not hindsight bias is strong. In a study completed by Louie, Curren and Harich (2000) that tests hindsight bias by looking into teams who were competing and their decision outcomes after playing a simulation game, they found that the self-evaluating participants only showed hindsight bias when the outcomes turned out to be in their favor. Research indicates this is because people are extremely optimistic about doing well and attempt a positive self-view (Louie, Curren, & Harich,

Basically, hindsight bias is when you claim to predict a certain outcome in a situation after the outcome has already occurred. For instance, when you have friends that get married and you tell them at the wedding, “I knew you would be a perfect match” or when the Indians won the state playoffs and I claim, “I knew you all would win the whole thing” after it happened. It was an assumption after the fact, never an earlier prediction, nor anything that could be backed up with facts or science.

The decision making process is not without mistakes. We are human and humans make mistakes. At times, these mistakes are bridged with biases and occur when judgemental heuristics are used. This is a process in which people use unconscious shortcuts to reduce information processing. These shortcuts come from our past experiences and have both pros and cons. There are eight biases the text discusses including availability heuristic, representativeness heuristic, confirmation bias, anchoring bias, overconfidence bias, hindsight bias, framing bias, and escalation of commitment bias (Kreitner & Kinicki, 2013).

Transocean and BP allowed several biases to alter their decision-making skills. There are eight decision-making biases that can take a major toll on decision making. Also, judgmental heuristics are in effect when these biases occur. Judgmental heuristics is a mental shortcut that people use to come to a solution quickly and process information quickly (Moisand, 2000). Of the eight biases that alter decision making, representative heuristic, confirmation bias, and mainly the overconfidence bias. The representative heuristic is an assessment of the probability of an event happening a certain way because it has happened that certain before (Nilsson, Juslin, & Olsson, 2008). If this issue has occurred before, it is likely that these top two employees based their decision to do nothing off of what happened before. Also, the confirmation bias displays itself greatly within this case. The top two employees decided to make their decision before researching what is causing the issue.

Representative Heuristics is used in making judgments under uncertainty. In making judgments, people usually pay attention to the similarity between such event and a standard process. In one example, when I had severe pain and had ulcers in my stomach, everybody in the family asked me about whether I had experienced stress and worries over my life. Everybody was concerned that I was young and had started worrying about life to the point of developing ulcers. In so doing, they referred to a similar case in the neighborhood where severe mental stress had resulted in severe ulcers. Yet, the ulcers were caused by a certain bacterial infection in my stomach. It was successfully treated and I regained my health.

Everyone has a bias, even I do. Biases shape the world as all they do is change how people think and there is sometimes no known reason on why people have biases. I don’t know why I guess a person's personality because of their face but I do it. Biases are very interesting to talk about because there is not a lot to know from them but the impact our world more than we think.

It is an ultimate consequence of the huge volume of accessible information. Several decision biases such as heuristic thinking, narrow framing, or choice bracketing are the consequences of limited attention. Psychological literature has identified two basic features of human information processing: i) selection of the set of items and ii) the processing of selected items by allocating limited mental resources (Pashler, 1998). Consider a situation where a student focuses on understanding the academic implications of taking PhD-level courses in the very first semester, s/he may be unable to focus on dissertation research carefully at the same time. Additionally, attentional biases can influence individual’s beliefs which depends on the memory and salient information processing (Tversky and Kahneman, 1973). Therefore, limited attention would be a special case of divided attention under heuristic thinking and information processing (Lacetera et al.,

It is a type of expert system which can be useful for repetitive complex forecasting problems when historical data on the variable to be forecasted are lacking or of poor quality. It is more accurate the aided judgment.

b. The illusion of knowledge: When people are given more information on which to base a forecast or

There are also other external factors that can have an effect. There are institutional firms that do “strongly believe that behavioural biases cause investors to over- or underreact to new information as sentiment and emotion cloud their judgment” (Roodt, 1). They acknowledge this with the hope that by recognizing its existence they are already doing at least a small part to combat biases in valuations for the analysts.