BazermanMoore

36 Chapter 2: Common Biases
Estimate Lower Upper
___ ___ ___ a. Wal-Mart’s 2006 revenue
___ ___ ___ b. Microsoft’s 2006 revenue
___ ___ ___ c. World population as of July 2007
___ ___ ___ d. Market capitalization (price per share times number of shares
outstanding) of Best Buy as of July 6, 2007
___ ___ ___ e. Market capitalization of Heinz as of July 6, 2007
___ ___ ___ f. Rank of McDonald’s in the 2006 Fortune 500
___ ___ ___ g. Rank of Nike in the 2006 Fortune 500
___ ___ ___ h. Number of fatalities due to motor vehicle accidents in the
United States in 2005
___ ___ ___ i. The national debt of the U.S. federal government as of July 2007
___ ___ ___ j. The U.S. federal government budget for the 2008 fiscal year
How many of your ten ranges actually surround the true quantities? If you set your
ranges so that you were 98 percent confident, you should expect to correctly bound approximately
9.8, or nine to ten, of the quantities. Let’s look at the correct answers: (a)
$351,139,000,000 ($351 billion); (b) $44,282,000,000 ($44 billion); (c) 6,602,224,175 people
(6.6 billion); (d) $23,150,000,000 ($23 billion); (e) $15,230,000,000 ($15 billion); (f) 108;
(g) 158; (h) 43,443; (i) $8,800,000,000,000 ($8.8 trillion); (j) $2,900,000,000,000 ($2.9
trillion).
How many of your ranges actually surrounded the true quantities? If you surrounded
nine or ten, we can conclude that you were appropriately confident in your
estimation ability. Most people surround only between three (30 percent) and seven
(70 percent), despite claiming a 98 percent confidence that each range will surround
the true value. Why? Most of us are overconfident in the precision of our beliefs and
do not acknowledge our true uncertainty. 1
In Alpert and Raiffa’s (1969/1982) initial demonstration of overconfidence based
on 1,000 observations (100 participants on 10 items), 42.6 percent of quantities fell
outside 90 percent confidence ranges. Since then, overconfidence has been identifiedasacommonjudgmentalpatternanddemonstratedinawidevarietyofsettings.
Why should you be concerned about overconfidence? After all, it has probably given
you the courage to attempt endeavors that have stretched your abilities. Unwarranted
confidence can indeed be beneficial in some situations. However, consider
the potential adverse effects of excess confidence in the following situations:
You are a surgeon who is trying to persuade a patient’s family to agree to a difficult
operation. When the family asks you to estimate the likelihood that the patient will
survive the operation, you respond, ‘‘Ninety-five percent.’’ If the patient dies on the
1 Note that some researchers have used the term ‘‘overconfidence’’ to describe other phenomena, including
believing that we are better than others or overestimating our control over events. We will use the word
‘‘overconfidence’’ to refer only to excessive confidence in the precision of subjective estimates, or what Moore
and Healy (2007) call ‘‘overprecision.’’