Is the mind, by design, predisposed against performing Bayesian inference? Previous research on base rate neglect suggests that the mind lacks the appropriate cognitive algorithms. However, any claim against the existence of an algorithm, Bayesian or otherwise, is impossible to evaluate unless one specifies the information format in which it is designed to operate. The authors show that Bayesian algorithms are computationally simpler in frequency formats than in the probability formats used in previous research. Frequency formats correspond to the sequential way information is acquired in natural sampling, from animal foraging to neural networks. By analyzing several thousand solutions to Bayesian problems, the authors found that when information was presented in frequency formats, statistically naive participants derived up to 50 % of all inferences by Bayesian algorithms. Non-Bayesian algorithms included simple versions of Fisherian and Neyman-Pearsonian inference. Is the mind, by design, predisposed against performing Bayesian inference? The classical probabilists of the Enlightenment, including Condorcet, Poisson, and Laplace, equated probability theory with the common sense of educated people, who were known then as “hommes éclairés.” Laplace (1814/1951) declared that “the theory of probability is at bottom nothing more than good sense reduced to a calculus which evaluates that which good minds know by a sort of instinct,

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Research on people’s confidence in their general knowledge has to date produced two fairly stable effects, many inconsistent results, and no comprehensive theory. We propose such a comprehensive framework, the theory of probabilistic mental models (PMM theory). The theory (a) explains both the overconfidence effect (mean confidence is higher than percentage of answers correct) and the hard-easy effect (overconfidence increases with item difficulty) reported in the literature and (b) predicts conditions under which both effects appear, disappear, or invert. In addition, (c) it predicts a new phenomenon, the confidence-frequency effect, a systematic difference between a judgment of confidence in a single event (i.e., that any given answer is correct) and a judgment of the frequency of correct answers in the long run. Two experiments are reported that support PMM theory by confirming these predictions, and several apparent anomalies reported in the literature are explained and integrated into the present framework. Do people think they know more than they really do? In the last 15 years, cognitive psychologists have amassed a large and apparently damning body of experimental evidence on overconfidence in knowledge, evidence that is in turn part of an even larger and more damning literature on socalled cognitive biases. The cognitive bias research claims that people are naturally prone to making mistakes in reasoning and memory, including the mistake of overestimating their knowledge.

the heuristics-and-biases approach to statistical reasoning is and is not about. At issue is the imposition of unnecessarily narrow norms of sound reasoning that are used to diagnose so-called cognitive illusions and the continuing reliance on vague heuristics that explain everything and nothing. D. Kahneman and A. Tversky (1996) incorrectly asserted that Gigerenzer simply claimed that frequency formats make all cognitive illusions disappear. In contrast, Gigerenzer has proposed and tested models that actually predict when frequency judgments are valid and when they are not. The issue is not whether or not. or how often, cognitive illusions disappear. The focus should be rather the construction of detailed models of cognitive processes that explain when and why they disappear. A postscript responds to Kahneman and Tversky's (1996) postscript. I welcome Kahneman and Tversky's (1996) reply to my critique (e.g., Gigerenzer, 1991, 1994; Gigerenzer & Murray, 1987) and hope this exchange will encourage a rethinking of research strategies. I emphasize research strategies, rather than specific empirical results or even explanations of those results, because I believe that this debate is fundamentally about what

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities. It is one of the essential features of such incompetence that the person so afflicted is incapable of knowing that he is incompetent. To have such knowledge would already be to remedy a good portion of the offense. (Miller, 1993, p. 4) In 1995, McArthur Wheeler walked into two Pittsburgh banks

Early studies of intuitive judgment and decision making conducted with the late Amos Tversky are reviewed in the context of two related concepts: an analysis of accessibility, the ease with which thoughts come to mind; a distinction between effortless intuition and deliberate reasoning. Intuitive thoughts, like percepts, are highly accessible. Determinants and consequences of accessibility help explain the central results of prospect theory, framing effects, the heuristic process of attribute substitution, and the characteristic biases that result from the substitution of nonextensional for extensional attributes. Variations in the accessibility of rules explain the occasional corrections of intuitive judgments. The study of biases is compatible with a view of intuitive thinking and decision making as generally skilled and successful.

What counts as human rationality: reasoning processes that embody content-independent formal theories, such as propositional logic, or reasoning processes that are well designed for solving important adaptive problems? Most theories of human reasoning have been based on content-independent formal rationality, whereas adaptive reasoning, ecological or evolutionary, has been little explored. We elaborate and test an evolutionary approach, Cosmides’ (1989) social contract theory, using the Wason selection task. In the first part, we disentangle the theoretical concept of a “social contract” from that of a “cheater-detection algorithm.” We demonstrate that the fact that a rule is perceived as a social contract—or a conditional permission or obligation, as Cheng and Holyoak (1985) proposed—is not sufficient to elicit Cosmides’ striking results, which we replicated. The crucial issue is not semantic (the meaning of the rule), but pragmatic: whether a person is cued into the perspective of a party who can be cheated. In the second part, we distinguish between social contracts with bilateral and unilateral cheating options. Perspective change in contracts with bilateral cheating options turns P & not-Q responses into not-P & Q responses. The results strongly support social contract theory, contradict availability theory, and cannot be accounted for by pragmatic reasoning schema theory, which lacks the pragmatic concepts of perspectives and cheating detection.

This article discusses the history underlying the new literature, describes some of what has been learned thus far, and looks ahead towards making further progress

Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles, principles which come primarily from psychology, sociology and anthropology. The behavioral principles discussed are: prospect theory, regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over- and underreaction, representativeness heuristic, the disjunction effect, gambling behavior and speculation, perceived irrelevance of history, magical thinking, quasi-magical thinking, attention anomalies, the availability heuristic, culture and social contagion, and global culture. Theories of human behavior from psychology, sociology, and anthropology have helped motivate much recent empirical research on the behavior of financial markets. In this paper I will survey both some of the most significant theories (for empirical finance) in these other social sciences and the empirical finance literature itself. Particular attention will be paid to the implications of these theories for the efficient markets hypothesis in finance. This is the hypothesis that financial prices efficiently incorporate all public

Evolutionary approaches to judgment under uncertainty have led to new data showing that untutored subject reliably produce judgments that conform to may principles of probability theory when (a) they are asked to compute a frequency instead of the probability of a single event, and (b) the relevant information is expressed as frequencies. But are the frequencycomputation systems implicated in these experiments better at operating over some kinds of input than others? Principles of object perception and principles of adaptive design led us to propose the individuation hypothesis: that these systems are designed to produce wellcalibrated statistical inferences when they operate over representations of “whole ” objects, events, and locations. In a series of experiments on Bayesian reasoning, we show that human performance can be systematically improved or degraded by varying whether a correct solution requires one to compute hit and false-alarm rates over “natural ” units, such as whole objects, as opposed to inseparable aspects, views, and other parsings that violate evolved principles of object construal. The ability to make well-calibrated probability judgments depends, at a very basic level, on the ability to count. The