Bayes Rule As A Descriptive Model

Bayes Rule as a Descriptive Model: The Representativeness Heuristic
Author(s): David M. Grether

Source: The Quarterly Journal of Economics, Vol. 95, No. 3 (Nov., 1980), pp. 537-557
Published by: Oxford University Press
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BAYES RULE AS A DESCRIPTIVE MODEL:
THE REPRESENTATIVENESS HEURISTIC*
DAVID M. GRETHER
Results of experiments designed to test the claim of psychologists that expected
utility theory does not provide a good descriptive model are reported. The deviation
from tested theory is that, in revising beliefs, individuals ignore prior or base-rate in-
formation contrary to Bayes rule. Flaws in the evidence in the psychological literature
are noted, an experiment avoiding these difficulties is designed and carried out, and
the psychologists' predictions are stated in terms of a more general model. The psy-
chologists' predictions are confirmed for inexperienced or financially unmotivated
subjects, but for others the evidence is less clear.
There are a number of areas of economic research for which the
nature of individual decision processes is important. In addition, there
are some substantive areas to which economic theory has been applied
in which market forces cannot be relied upon to "discipline" the be-
havior of economic agents. Recently economists have begun to study
the sensitivity of market equilibria to imperfect information. These
studies have considered labor markets [Mortensen, 1976, and Wilde,
1977] and consumer products market [Salop and Stiglitz, 1977, and
Wilde and Schwartz, 1979]. One of the conclusions which has emerged
from this literature is that the properties of market equilibria are
sensitive to the search strategies used by individual consumers or
workers. For example, consider Salop and Stiglitz [1977] versus Wilde
and Schwartz [1979]. Knowledge about individual behavior under
uncertainty can also be of importance in several policy areas. Exam-
ples are interventions in markets where information is incomplete
[Schwartz and Wilde, 1979], the provision of insurance against natural
disasters [Slovic et al., 1977b], a variety of "truth in lending" or la-
beling-type issues, etc. Also, note the use of economic theory in non-
market settings, e.g., the analysis of voting [Riker and Ordeshook,
1973], and legislative behavior [Fiorina, 1974]. In addition, there are
situations to which economic theory of individual behavior has been
applied in which no trades or arbitrage is possible, e.g., such areas as
crime [Becker, 1968, and Erlich, 1975], suicide [Hamermesh and Soss,
1974], marriage [Becker, 1973, 1974], and extramarital affairs [Fair,
1978].
*
Financial support by the National Aeronautics and Space Administration is
gratefully acknowledged. I would like to thank my colleagues,
Forrest D. Nelson,
Charles R. Plott, and Louis L. Wilde for their many helpful suggestions and comments,
and Steven Matthews, Brian Binger, Elizabeth Hoffman, and Gerhard Befeld for their
research assistance.
? 1980 by the President and Fellows of Harvard College. Published by
John
Wiley
&
Sons,
Inc.
The Quarterly Journal of Economics, November 1980 0033-5533/80/0095-0537$02.10
538 QUARTERLY JOURNAL OF ECONOMICS
In a series of papers [Kahneman and Tversky (K and T), 1972,
1973; and Tversky and Kahneman (T and K), 1971, 1973,
19741,
D.
Kahneman and A. Tversky have suggested that individuals use certain
heuristics in making decisions under uncertainty. When adopted,
these heuristics (which are called availability, representativeness, and
anchoring) lead to certain predictable and consistent biases in indi-
vidual judgments concerning the likelihood of uncertain events. In
their experiments people simply do not behave as predicted by eco-
nomic theory. K and T present detailed and persuasive experimental
evidence which supports their view that, in some circumstances,
in-
dividuals adopt the simple rules of thumb that K and T have char-
acterized. Their experiments,
of course, were not designed for an
economics audience, and it is not clear from the evidence they present
whether or not the behavior they find could be expected to be an
important factor in an economic setting. The purpose of this paper
is to report the results of a series of experiments designed to test, in
a way relevant to economics,
one of the heuristics; namely, repre-
sentativeness.
The plan of the paper is as follows. The heuristic and the nature
of the evidence concerning it is discussed in Section 1. The experi-
mental design is presented in Section II, and the results are presented
in Section II. The discussion of the results and the conclusions of the
paper are given in Section IV.
The final conclusion reached is that the representativeness
heuristic, as interpreted here, is a good descriptive model of behavior
under uncertainty for untutored and unmotivated (or at least not fi-
nancially motivated) individuals. There is some evidence that with
increasing experience and financial motivation individuals rely less
on the rule of thumb and act more like Bayesians, but the evidence
for this latter position is far from conclusive.
I
K and T provide evidence concerning the representativeness
heuristic in three papers [T and K, 1971, 1973; K and T, 1972].
"A
person who follows this heuristic evaluates the probability of an un-
certain event, or a sample, by the degree to which- it is (i) similar in
essential properties to its parent population and (ii) reflects the salient
features of the process by which it is generated" [K and
T, 1972, p.
4311.
An example of the representativeness heuristic is given by the
following experiment reported in K and T [19731 and T and K
[19741.
BAYES RULE AS A DESCRIPTIVE MODEL 539
Eighty-five subjects were given the following instructions.
A panel of psychologists have interviewed and administered personality tests to 30
engineers and 70 lawyers, all successful in their fields. On the basis of this information,
thumbnail descriptions of the 30 engineers and 70 lawyers have been written. You will
find on your forms five descriptions chosen at random from the 100 available. For each
description, please indicate your probability that the person described is an engineer
on a scale of 0 to 100 [K and T, 1973, p. 241].
Another group of 86 subjects was given identical instructions, except
that the number of lawyers was changed to thirty and the number of
engineers to seventy. Both groups were given the same five descrip-
tions, one of which was the following:
Jack is a forty-five year old man. He is married and has four children. He is generally
conservative, careful, and ambitious. He shows no interest in political and social issues
and spends most of his free time on his many hobbies which include carpentry, sailing,
and mathematical puzzles. The probability that Jack is one of the 30 [70] engineers
in the sample of 100 is --%
[1973,
p. 241].
In addition the two groups were asked the following question:
Suppose now that you are given no information whatsoever about an individual chosen
at random from the sample. The probability that this man is one of the 30 [70] engineers
in the sample of 100 is --%
[1973,
p. 241].
Both groups of subjects gave nearly the same posterior probabilities
for each of the five descriptions in spite of the substantial change in
the priors. Some of the descriptions were intended to sound very much
like lawyers, and others very much like engineers, so that a subject
using the representativeness heuristic is expected to assign a high
probability that a description is of, say, a lawyer, even though the prior
probability is small. For one of the five descriptions the median es-
timate of the probability that the man chosen was an engineer was
around 0.05 for both groups of subjects, and another of the descrip-
tions was around 0.95. Both groups made the "correct" response to
the question quoted above. Perhaps the most interesting result re-
ported was the response to the following:
Dick is a thirty-year old man. He is married with no children. A man of high ability and
high motivation he promises to be quite successful in his field. He is well liked by his
colleagues [1973, p. 242].
This description was intended to be neutral, and apparently was
judged so by both subjects. For both groups the median estimate was
0.50. Thus, these subjects evaluated useless information and no in-
formation quite differently.
The results of K and T certainly do support the hypothesis that
individuals judge by something like representativeness and ignore
prior probabilities. The responses to the vacuous description and the
fact that the subjects were reminded of the prior odds after each de-
scription was given are especially convincing. Nevertheless, this ex-
periment has features that make the applicability of the findings to
economic decisions doubtful. First, there is the difficulty of controlling
the information given when verbal descriptions or situations are
presented. This problem is well illustrated by the results reported by
Hammerton [1973], who demonstrated that rewording mathemati-
cally equivalent problems could lead subjects to provide different
answers. (For a more detailed discussion see Grether [1978].)
A second potential source of difficulty is that, as is often the case
in experiments, the subjects are not told the truth about the random
process being examined. Clearly, the thumbnail descriptions were not
a random sample from the alleged population. The subjects' responses
would agree with Bayes rule only if they either "played the game" or
believed the experimental instructions and thereby badly misper-
ceived what was going on. Also, the use of the word "probability" in
the instructions raises questions about the results. After all, the proper
definition of the term has been the subject of a major debate among
statisticians for years.
Finally, there is the question of incentives; it is not clear that K
and T's subjects had a positive incentive to give "correct" answers.
The instructions included the following statement:
The same task has been performed by a panel of experts, who are highly accurate in
assigning probability to the various descriptions. You will be paid a bonus to the extent
that your estimates come close to those of the expert panel [1973, p. 241].
Thus, there was an incentive to behave as the "experts," which may
or may not be interpreted as attempting to give the right answer.
K and T present additional evidence in favor of the representa-
tiveness hypothesis and some evidence that many truths of mathe-
matical statistics are not intuitive concepts even to individuals trained
in them (see also T and K [1971]). In particular, regression effects (e.g.,
sampling based upon the value of the dependent variable) and sam-
pling variability are often misunderstood. Also, it should be noted that
judgment by representativeness has other implications, e.g., insen-
sitivity to sample size and certain misconceptions concerning ran-
domness. Consider a sample drawn from a binomial distribution.
The most salient property of a binomial sample is, clearly, the sample proportion. Hence
we expect, at least in the aggregate case, that the subjective posterior probability will
depend primarily on the proportion of red chips, say, in the sample with little or no
regard to the size of the sample or to the difference between the proportion of red chips
in the two symmetric populations [K and T, 1972, p. 446].
II
In order to test the representativeness hypothesis, a series of
experiments were conducted using students from Pasadena City
College, Occidental College, University of Southern California, Cal-
ifornia State University Los Angeles, California State University
Northridge, and University of California at Los Angeles as subjects.
These experiments (not counting a pilot experiment run at California
Institute of Technology) involved a total of 341 subjects.
Students were recruited from a variety of classes. They were told
that an "economics experiment" was to be held and were given the
time and place of the experiment. They were guaranteed that the
experiment would last no more than one hour and that they would
be paid at least five dollars for participating. They were given no other
prior information concerning the nature of the experiment. When the
subjects arrived, they were randomly sent to two different rooms. The
only difference in practice between the rooms was the method of
payment.
Instructions were passed out, and after obtaining the partici-
pants' names and social security numbers, the first three paragraphs
of the instructions were read aloud to the subjects (see Appendix).
At this time the subjects elected one of themselves to be a mon-
itor. The monitor was allowed to inspect all equipment, and more
importantly, to observe all procedures during this experiment. It was
stated in the instructions that the monitor "should check the truth-
fulness of what the experimenter says, but other than that may not
communicate any information to you in any way. If the monitor
communicates any other information, he or she will be asked to leave
without payment." It appeared that this solved the credibility prob-
lem, and most monitors were quite conscientious and occasionally
even officious.
After the monitor was elected, the remainder of the instructions
were read, and subjects' questions were answered. Once it appeared
that subjects understood what their tasks were, the procedures were
gone through (i.e., a dry run so to speak) to make sure that the subjects
fully understood the mechanics of the experiment.
The equipment used consisted of three bingo cages and an
opaque screen. One of the cages designated Cage X contained balls
numbered one through six. The second cage (Cage A) contained four
balls marked with an "N" and two balls marked with a "G,"
and the
third cage (Cage B) also contained six balls, three marked with an "N"
and three with a "G." All balls were the same color and it was not
possible to distinguish between cages except by close inspection.
The experiment proceeded as follows: Cages A and B were put
behind the screen, and the rule used to determine which of them was
to be chosen was announced; Cage X served as the "prior." The rules
were of the form "if one of the numbers one through k is drawn from
Cage X, we shall choose Cage A; otherwise we shall choose Cage B."
k was varied between two and four, thereby generating prior odds
ratios for Cage A of one-half, one, and two. Next, a ball was drawn
from Cage X (the subjects could not see the number on the ball) and,
depending upon that number, either Cage A or Cage B was chosen and
a sample of size six was drawn (with replacement) from it. After each
draw the result ("N" or "G") was announced, written on a blackboard,
and also recorded by the subjects on forms provided. After the six
draws were completed, subjects were asked to indicate on their forms
"the one (cage) you think the balls came from." Subjects were allowed
to take as long as they wished, and when all were ready, the procedure
was repeated again (with possibly a different prior).
The sample size of six and sample proportions were picked so that
the probability of picking a sample that "looked like" one of the parent
populations (four N's and two G's or three N's and three G's) was
large; the idea being that if the representativeness hypothesis is cor-
rect, subjects would tend to think that such samples came from the
population they "looked like," even though the actual posterior odds
favored the other cage, considering the prior odds.
Notice that, although designed to test hypotheses about the
forming of subjective probabilities, everything was handled opera-
tionally, so that one does not need to speculate about how the words
"odds" or "probabilities" are interpreted. In addition, the subjects
actually are observing the results of the random process described to
them, rather than being shown a series of nonrandom data and asked
to believe that (counterfactually) the data were generated by a par-
ticular random process. Though the data are generated as described,
this does not assure that the subjects believe that they are, and the
use of the monitor was intended to provide additional credibility. By
asking for judgments about bingo cages and the numbers one through
six, the problem of accidentally "importing" information when
problems are presented in story form is avoided.
Table I gives the posterior probabilities for each outcome-prior
combination, and Table II shows the posterior odds in favor of the
most likely alternative. Notice that the experiment has been designed
so that several outcome-prior combinations have the same (or nearly
the same) posterior odds.
Two cells with the same posterior odds might be thought of as
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representing equally difficult problems for the subjects. Thus, all six
situations in which the odds favoring the most likely alternatives are
1.4:1 may represent equally difficult choices. Note that in two of these
cases the observed data are three N's, and in two cases the data are
four N's. As interpreted here, the representativeness hypothesis
predicts that when subjects observe four (three) N's, they will tend
to believe that the sample came from the population it is represen-
tative of-Cage A (Cage B). From Tables I and II, one can see that of
the six cases with posterior odds of 1.4:1 (or 1:1.4) a subject using the
representativeness heuristic would be led to make the correct response
in two cases, the incorrect response in two cases, and be uninfluenced
in two cases.
Finally, in order to provide subjects with an incentive to give
correct answers, and to measure the effect of the incentive, subjects
were paid in two different ways. In one room all subjects were told that
they would be paid $7 at the end of the experiment. In the other room
the subjects were told that at the end of the experiment one of their
decisions would be chosen (again by drawing numbers from a bingo
cage), and if the event that the subject had indicated was the most
likely occurred, they would receive $15; otherwise they would be paid
$5. The only exception was the last experiment that was run using two
sections of an introductory logic course at California State University
at Northridge. For this experiment both groups were under monetary
incentives for accuracy.
III
Table III shows the proportion correct for the several situations
for which the posterior odds favoring the most likely alternatives are
1.4 to 1, by school and method of payment. Note that in almost every
case the assumption that some of the subjects are using a heuristic
similar to representativeness would explain the pattern found. Also,
it is apparent that reliance on the heuristic is not markedly affected
by the use of monetary incentives.
Analysis of the contingency tables underlying Table III
supports
the conclusion just mentioned. There are significant differences
among the proportions correct across the three types
of events shown
in the table
(X2(2)
=
154). The Northridge data are omitted in all the
significance tests. On the other hand, there does not appear to be a
systematic effect of the monetary incentive. Subjects paid for accuracy
were more frequently correct for events of type A
(X2(l)
=
7), less
often correct for events of type B
(X2(l)
=
14), and more often correct
TABLE III
EFFECTS OF REPRESENTATIVENESS PERCENT CORRECT WITH POSTERIOR
ODDS OF 1.4:1
With Without
monetary incentives monetary incentives
School Aa Bb cc Aa Bb cc
Pasadena City College 55 86 86 43 76 83
Occidental College 59 72 88 55 76 79
University of Southern
California 64 95 88 58 87 100
California State University,
Los Angeles 67 76 84 51 60 70
University of California,
Los Angeles 60 70 81 62 71 86
Northridge 1 56 90 63
a. A = Representativeness favors wrong choice.
b. B = No representativeness data.
c. C =
Representativeness favors right choice.
though not significantly so
(X2(l)
=
1) for events of type C. Pooling
across the three types of events, one finds that those paid for accuracy
were correct 73 percent of the time compared with 70 percent for the
others. This difference, while in the direction an economist would
predict, is rather modest and statistically insignificant
(X2(l)
=
3.0).
From Tables I and II one can see that there are two remaining
cases in which the representativeness heuristic is available (three N's
prior 1:2 and four N's prior 2:1), and four other cases with the same
or nearly the same posterior probabilities. For the cases for which the
representativeness heuristic applies, the subjects were correct 91
percent of the time compared with 88 percent correct in other ones.
This difference, while in the direction predicted of the use of the
representativeness heuristic, is statistically insignificant.
As discussed in the previous section, one of the implications of
the representativeness hypothesis is that individuals judging likeli-
hood of representativeness should tend to ignore prior probabilities.
Consider the case when the representativeness heuristic is available.
That is, the cases when N
=
3 or N
=
4 so that the sample "looks like"
one of the parent population. Table IV shows that even for these cases
TABLE IV
PERCENT STATING "A" MOST LIKELY (posterior odds 1.4:1 or 1:1.4)
With Without
monetary incentives monetary incentives
Prior Odds for A Prior Odds for A
School 2:1 1:1 1:2 2:1 1:1 1:2
Data N = 3
Pasadena City College 50 11 16 48
-
California 68 5 0 60 0
Los Angeles 35 15 12 53 15
Los Angeles
8 64 6
Northridge 2 65 8 0
Data N = 4
Pasadena City College 76 35 91 83 59
California
95 73 55 93
- 43
Los Angeles
81 82 18 90 70 50
Los Angeles
94 80 30 96 86 40
Northridge 1 55 48
the prior odds clearly affected the choices made by the subjects. As
before, the effects are statistically significant and hold independently
of the use of monetary incentives.
Thus, it appears that something like the representativeness
heuristic is being employed by the subjects, but some consideration
is also being given to the prior probabilities. Thus, while the repre-
sentativeness heuristic may partially explain the subjects' behavior,
a more general model is required to characterize what is going on even
in this simple situation. Let Y* be the subjective log odds in favor of
Cage A of subject i at time t, i.e., e
Yt is the ith subject's posterior odds
in favor of A. Consider the following model:
Yi
(
PA
eLRA]
PA
1
Uit
(1) e<
1-( PA) it= ea[LR(A)I$-
[1
PA.
t
where (PA/(1 -PA)) is the subjects' posterior odds, LR(A) =
L(XIA)/L(XjB)
is the likelihood ratio for A, PA/(1 -PA) is the prior
odds in favor of A, and
ui
is a random variable with mean zero and
finite variance. Of course, if subject i correctly follows Bayes rule, then
a = 0,
/1
=
02
= 1, and
uit
0.
In the experiments reported here, direct observations on Y* are
not available, but from the subjects' choice behavior we can observe
the variable
Yit,
where
(2)
Yit
=
1
if Ye
>
0
= 0 otherwise.
Taking logarithms of (1) gives
(3) Yit
= a
+
0
In
LR(A)t +02 Inl
1 -P
+ Uit,
which is suitable for estimating by logit, probit analysis,
or other
similar methods [McFadden, 1976; Amemiya, 1975; Maddala, 1977,
Ch. 9; and Dhrymes, 1978, Ch. 7]. It should be pointed out that the
model presented here is different from,
and not
completely
consistent
with, the representativeness heuristic if
generalized
to other situa-
tions. This is because opinions formed according to (1) will, of course,
be sensitive to sample size through the likelihood ratio. All of the
experiments reported here used a single sample size, so this was not
of concern.
Since Yt is not observed, the parameters of (3)
can be estimated
only up to an unknown scale parameter. Nevertheless, one can for-
malize the various polar hypotheses to be tested.
Bayes Rule
a =
0, /1
=
/2 > 0-
Representativeness Hypothesis /13
>
02
>
0-
Thus, the interpretation of K and T's representativeness heuristic
suggested here is that individuals place greater weight on the likeli-
hood ratio than on the prior odds and consider both factors when
making decisions. An alternative formulation is the following:
(4) Yt
= a +
/1
In LR(A)t +02
In
(
PA)
+
/3D3t
+
/4D)4t
+
Uit,
where
D3
=
1 if
Nt
=
3
= 0 otherwise;
D4t=1 ifNt=4
= 0 otherwise.
Here the binary variables single out those observations that "look like"
one of the parent populations.
In the model, Tversky and Kahneman's hypothesis could be in-
terpreted as
/33<0,
/34>0.
In this model, unless
/1
< /2 individuals will be giving "too much"
weight to the evidence and too little to the prior. Note that if indi-
viduals cue only on the observations that "look like" one of the two
parent populations, /1
and /2 could be equal, while in the first model
/1 > /2. To the extent that priors are consistently underweighted, one
would expect /1
to be greater than /2. In any event both parameters
should be positive.
The results of estimating the parameters of (3) are shown in
Table V. All estimates reported are based on maximum likelihood
logit analysis. For the purposes of the analysis the subjects were di-
vided into four groups, depending upon whether or not there was a
monetary incentive to be accurate and whether the subjects were
"experienced." A subject was classified as experienced on the jth trial
if the subject had previously been exposed to (i.e., had observed) the
same prior-outcome combination as occurred on the jth trial. This
separation of the observations was done because inspection of the data
suggested that subjects were more likely to give the correct response
if they had seen the same problem before.
Note that in every case the coefficient on the likelihood ratio
exceeds the coefficient of the log of the prior odds, and that the dif-
ferences are statistically significant. This result is as predicted by our
generalization of the representativeness heuristic. Thus, it does ap-
pear, as T and K have suggested, that individuals tend to give too little
weight to prior information. Note, however, that the prior odds do
appear to enter significantly in the equations.
The hypothesis that a single function holds for the several data
sets can be tested with a likelihood ratio test. Using the result that
asymptotically minus twice the logarithm of the likelihood ratio is
distributed as chi squared with degrees of freedom, given by the
number of restrictions tested [Kendall and Stuart, 1967, pp. 230-31],
TABLE V
LOGIT RESULTS
Y* =a+I31nLR(A) +321nPA/(l-PA) +u
(numbers in parentheses are t-ratios)
Groupa a
01
/2
011-132
-2 In L n
PF -0.09 2.01 1.43 0.58 1,589.0 1,747
(1.4) (19.9) (14.2) (4.9)
PS -0.25 2.86 2.34 0.52 996.0 1,170
(2.8) (14.0) (15.9) (2.8)
NF 0.17 1.78 1.21 0.57 1,485.1 1,630
(2.5) (19.5) (10.5) (4.6)
NS 0.24 2.65 2.17 0.48 874.9 1,061
(2.8) (15.3) (13.6) (2.9)
P. -0.11 2.25 1.82 0.43 2,612.8 2,917
(2.2) (24.4) (20.0) (4.4)
N- 0.18 2.02 1.58 0.44 2,393.9 2,691
(3.5) (24.7) (17.3) (4.5)
*F 0.04 1.86 1.33 0.53 3,085.8 3,377
(0.9) (27.9) (16.3) (6.4)
.S 0.00 2.62 2.20 0.42 1,887.9 2,231
(0.0) (20.5) (20.9) (3.4)
0.04 2.08 1.69 0.39 5,028.0 5,608
(1.1) (34.8) (26.4) (5.8)
a. Key to groups: *
=
summation;*. = all subjects; P =
monetary incentives were available; N = no monetary
incentives were available; F
=
inexperienced subjects, i.e., first time have seen a particular prior-outcome combi-
nation; S
=
experienced subjects.
the tests can be performed using the figures in the fifth column of
Table V. The results show that the same equation can be used to de-
scribe the behavior of inexperienced subjects whether or not they are
financially motivated. On the other hand, the hypothesis of homo-
geneity is rejected when one pools experienced and inexperienced
subjects or the two groups of experienced subjects.
The results from logit analysis using the extended model (4) are
shown in Table VI. The coefficient of the log likelihood ratio exceeds
the coefficient of the log prior odds for three of the four groups of
subjects, but the differences are not significant at the 0.01 level. For
all groups the sign of f3 is negative as predicted from the represen-
tativeness hypothesis, and in three out of four cases the sign of /4 is
positive. The individual coefficients
/3 and 34 are
frequently not
significantly different from zero and never significantly
differ from
each other in absolute value. Comparing the figures
in column 8 in
Table VI with those in column 5 of Table V, one sees that the pair of
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variables (D3,D3) is jointly significant for inexperienced subjects, but
not significant or less significant for experienced subjects. Thus, for
these data the qualitative predictions of the representativeness hy-
pothesis appear to be borne out.
As before, monetary incentives do not appear to affect the be-
havior of inexperienced subjects, in that the hypothesis that the same
functions describe both sets of subjects cannot be rejected at any
conventional level of significance. This is not true, however, for the
experienced subjects. Overall, the specification (4) seems to be su-
perior to (3) in that it generally fits the data better and also eliminates
the embarrassingly high t -ratios for the intercepts reported in Table
V. In these models, nonzero constant terms do not make any sense,
so leaving them in is a kind of test of the specification of the model.
Overall, the conclusion seems to be that the representativeness hy-
pothesis as developed here holds. That is, in forming subjective log-
odds subjects give relatively too much weight to the evidence and too
little weight to the prior odds. This conclusion follows for both forms
of the model considered here. When the simpler version (3) is used,
the coefficient of the log likelihood ratio is significantly greater than
the coefficients of the log prior odds. For those cases for which (4) is
the better model, the coefficient of the log likelihood ratio is either
greater than or not significantly different from the other coefficient,
and the "special event" factors are significant.
The estimates in Tables V and VI all assume that the subjects
from several educational institutions make up a homogeneous pop-
ulation. To test this hypothesis, (3) and (4) were reestimated for each
institution with the data broken into groups as in Tables V and VI.
The results obtained were consistent with those previously reported,
that is, generally subjects gave too much weight to the data as de-
scribed in the previous paragraph. For each of the categories shown
in Tables V and VI, the hypothesis of homogeneity across institutions
was usually rejected at conventional levels of significance. Since
qualitatively the results are similar to those in Tables V and VI, to save
space only the aggregate results are reported.
The final set of results is a generalization of the previous models,
designed to explore the definition of experience used in the previous
estimations. The model used is basically a heteroskedasticity model;
the assumption being that the logistic coefficients are the same for
both experienced and inexperienced subjects, but that the disturbance
distributions differ by a scale factor. The basic idea was that with
experience the amount of randomness in subjects' decisions might
be reduced, and that this would show up as a decrease in the disper-
sion of the distributions of the disturbances in (3) and (4).
It should be pointed out that for limited dependent variable
models heteroskedasticity leads to inconsistent parameter estimates,
though, of course, estimating the equation for each population sepa-
rately provides consistent but inefficient estimates. The estimates
in Table VII are maximum likelihood estimates for a logistic model
with heteroskedasticity. The form of the likelihood function is such
that no serious computational burdens are introduced by this gen-
eralization of the standard model. The primary simplification comes
from the cross partials of the likelihood function with respect to the
various population scale parameters being zero. The full details of this
are beyond the scope of this paper.
Table VII presents the results of refitting the model (4) under
the assumption that both "experienced" and "inexperienced" subjects
use the same functions (i.e., the same parameter values), but differ
only with respect to the dispersion of the distributions of the distur-
bances. The model (3) was also reestimated, but since the coefficients
of the binary variables were jointly significant, only the results from
(4) are reported. Note that there was no feedback during the course
of the experiment, so any "learning" that might have taken place re-
sults from familiarity with a problem or from further reflections on
it, etc.
The results of estimating the heteroskedastic model are rather
striking. In all but one case (one of the Northridge groups), the ex-
perienced subjects showed less random or "more precise" behavior
than the inexperienced subjects, though the result is statistically
significant for only two cases. Thus, in some sense opinion becomes
"firm" or a "consensus" emerges with repetition of a problem.
IV
In this paper some experimental work of Kahneman and Tver-
sky, presenting evidence that individual reasoning processes do not
follow the law of mathematical statistics, has been discussed. The
results of experiments designed to test the representativeness heu-
ristic in a manner relevant to economics were presented.
In addition to the basic model (1), two generalizations were es-
timated. The same qualitative results were obtained: individuals tend
to give too much weight to the "evidence" and thus too little weight
to their prior beliefs, though priors are not ignored. In addition, there
is some evidence that repetition of a problem or choice task even
without feedback leads to more firmly held opinions or less random-
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ness in judgment, in the sense that the distribution of the
ui
becomes
more concentrated. Finally, and to the author the most surprising,
the evidence that financial incentives affect the behavior is far from
compelling. Responses to unfamiliar problems (that is, problems that
had not previously been seen) showed no sensitivity to the presence
or absence of monetary incentives for accuracy, though as experience
is gained, the picture is not so clear.
Some may ask why we should care about the behavior of indi-
vidual students in the sorts of environments used in this paper. That
is, economic theory is really a theory of market behavior, i.e. of ag-
gregates, and that the repetitive nature of market interactions, to-
gether with the reinforcement provided by the profit system (eco-
nomic agents either learn to process information efficiently or are
forced to act as if they have), render single observations on individual
behavior irrelevant. Also, a relatively few individuals sensitive to ar-
bitrage possibilities may make markets work as predicted by the
theories. Thus, we really do not care much about individual behavior
or information processing capacity. At the beginning of the paper it
was argued that there are areas of economic research that require
economists to be concerned about the nature of individual decision
processes. It may be that the behavior of members of dissimilar groups
differs systematically,
and no claim is made that the results reported
here would replicate with qualitatively different subject pools (though
this is a testable proposition). However, conventional economic the-
ories as exposited do not discriminate among types of individuals; i.e.,
they do not contain parameters for students, stock market specialists,
housewives, business executives, etc. Thus, as long as individual de-
cision processes are a matter of legitimate concern for economics, the
results of the sort presented here are relevant to economics.
APPENDIX
INSTRUCTIONS
Name
Social Security Number
Address
The experimenters are trying to determine how people make
decisions. We have designed a simple choice experiment,
and we shall
ask you to make decisions at various times. The amount of money you
make will depend on how good your decisions are. During the exper-
iment you will be asked to make a number of decisions. At the end of
the experiment we shall randomly choose one of your decisions and
if it is correct, you will receive $15 and if it is incorrect, you will receive
$5.
If you look at the person in the front of the room, you will see that
he or she has three randomizing devices, otherwise known as bingo
cages, which are designated as Cage A, Cage B, and Cage X. Inside
both Cage A and Cage B are six balls, some of which are marked with
an N and some with a G. Cage A has four N's and two G's and Cage
B has three N's and three G's. Inside Cage X there are six balls
numbered one, two, three, four, five, and six.
The experiment will proceed as follows. First, we shall ask you
to select one individual as a monitor to watch the procedures, to ex-
amine the equipment, and to make sure that the experimenters really
are doing what they say they are doing. The monitor should check the
truthfulness of what the experimenter says, but other than that may
not communicate any information to you in any way. If the monitor
communicates any other information, he or she will be asked to leave
without payment. The monitor will receive $10 for his efforts.
(pick volunteer)
Now Cages A and B are put behind this screen, and we spin Cage
X. Before each run we will tell you that if certain numbers come up,
we will choose Cage A, and otherwise we will choose Cage B. For ex-
ample, if 1, 2, 3, or 4 are drawn, we will pick Cage A: if a 5 or 6 is drawn,
we will pick Cage B. After drawing from Cage X, the monitor will be
asked to choose the appropriate cage (A or B) from behind the screen.
Now the experimenter will make six draws from the cage, replacing
the drawn ball each time. He will write the results of the draws on the
board. You will be asked to indicate on your answer sheet whether you
think the draws come from Cage A or Cage B....
The only talking allowed during the course of the experiment will
be to clarify questions you may have about the procedure, and these
questions should be directed to the experimenter. We will now walk
through a complete run of the experiment to make sure everyone
understands the procedure.
Cage A has 4 N's and 2 G's
Cage B has 3 N's and 3 G's
Run No. 0. In this run there are
--
chances out of 6 for choosing
Cage A and
--
chances for choosing Cage B.
Record the results for this run:
Circle the one you think the balls come from. Cage A Cage B
Run No. 1. In this run there are
--
chances out of 6 for choosing A
and
--
chances for choosing Cage B.
Record the results for this run:
Circle the one you think the balls come from. Cage A Cage B
CALIFORNIA INSTITUTE OF TECHNOLOGY
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Bayes Rule As A Descriptive Model

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Bayes Rule as a Descriptive Model: The Representativeness Heuristic

Author(s): David M. Grether

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