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Updating Probabilities
Baucells, Manel Technical Note QA-0860 / Published April 25, 2018 / 9 pages.
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Product Overview

Individuals' judgement of probabilities—the likelihood of different events to occur, or the attribution of likely causes to what has occurred—is plagued by numerous biases and errors. This note focuses on Bayesian updating and the base rate neglect, and also provides a brief overview of other biases, including overconfidence, reversion to the mean, the law of small numbers, the conjunction fallacy, confirming evidence bias, hindsight bias, and the conjunction fallacy. Numerous examples illustrate the implications of the biases for managerial decisions.


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  • Overview

    Individuals' judgement of probabilities—the likelihood of different events to occur, or the attribution of likely causes to what has occurred—is plagued by numerous biases and errors. This note focuses on Bayesian updating and the base rate neglect, and also provides a brief overview of other biases, including overconfidence, reversion to the mean, the law of small numbers, the conjunction fallacy, confirming evidence bias, hindsight bias, and the conjunction fallacy. Numerous examples illustrate the implications of the biases for managerial decisions.

  • Learning Objectives