F in math
We suck at math. Well, that might be an overstatement, but it’s quite fair to say most people have a lot of difficulties dealing with it, especially with probabilities.
Let’s play and find out
Imagine you invested $1000 and suffer a 50% loss on the first day, but earned 50% back on the second day. How much do you end-up with?
Well, you end-up with 750. Did you get it right? If you didn’t, think over it step by step: 50% of 1000 is 500, and 50% of 500 is 250. So, you end up with 500+250. Quite easy after you think about it, right? Yet, not what comes to mind intuitively.
Let’s see how you do with this one:
Brenda is an introvert, very organized, loves reading and lives by himself. What is more likely, that she is a salesperson or a librarian?
Did you think librarian? Sorry, you are wrong. Why? Simply because there are many more salespersons than librarians in any city.
Why do we fail to get the correct answer? Because we rely on shortcuts called heuristics when computing probabilities.
In this case, what came into play is the Representativeness heuristic. The description of Brenda fits into a stereotype of librarian so we immediately think she’s one. Nevermind there are way less librarians than vendors In a similar way, all heads don’t seem representative of randomness. So we judge it as less likely that other options.
Another fact is that we use random data to estimate quantities. Whether is something we read, we heard or just came to mind in a completely unrelated manner, we use anchors to adjust our estimates. Quite weird but true!
In any case, you might find comfort in the fact that most people, even highly educated scholars, make the same mistakes you and I do
All these heuristics were described by Kahneman and Tversky, who showed that we rely on them to help us deal with probabilities. In essence, our judgments are influenced by what is similar (representativeness), what comes easily to mind (availability), and what random information is already there (anchoring).
Experiment after experiment, science has shown we have issues dealing with probabilities. There might be evolutionary reasons for this, and it might even be helpful in many situations. But when it comes to doing business, you need to be aware of this limitation.