Question

Errors in Odds: Describe in your own words one error that people make in estimating the odds of success.

Errors in Value: Describe in your own words one error that people make in estimating the value of that success.

Explain how these two errors can impact the ability to make a rational decision.

Answer 1

Errors in odds - We tend to underestimate or overestimate the odds more often. For example - Deciding between hiring a cab and walking a particular distance, we tend to overestimate or underestimate the distance.

Errors in value - Estimating odds are much easier than estimating the value. One error we frequently do is that we compare the scenario to the past instead of the possibilities. For example, if you lost your ticket on the way to the movies, you won’t buy another one because you already spend the $10. On the other hand, if you lost $10 on the way to the movies, you would still spend another $10 to buy the ticket. In both cases, you’re down $10. In the first case, you compare it to the past where you only spent $10 on a ticket and buying another would make it feel like you’re spending $20.