Subjective probability: A judgment of representativeness

Subjective probabilities play an important role in our lives. The decisions we make, the conclusions we reach, and the explanations we offer are usually based on our judgments of the likelihood of uncertain events such as success in a new job, the outcome of an election, or the state of the market. Indeed an extensive experimental literature has been devoted to the question of how people perceive, process, and evaluate the probabilities of uncertain events in the contexts of probability learning, intuitive statistics, and decision making under risk. Although no systematic theory about the psychology of uncertainty has emerged from this literature, several empirical generalizations have been established. Perhaps the most general conclusion, obtained from numerous investigations, is that people do not follow the principles of probability theory in judging the likelihood of uncertain events. This conclusion is hardly surprising because many of the laws of chance are neither intuitively apparent, nor easy to apply. Less obvious, however, is the fact that the deviations of subjective from objective probability seem reliable, systematic, and difficult to eliminate. Apparently, people replace the laws of chance by heuristics, which sometimes yield reasonable estimates and quite often do not.