Cognitive Biases in the Assessment of Risk
http://www.acceleratingfuture.com/people-blog/?p=2678
There was an actual legal case, and an experiment based on this legal case, where two groups had to estimate the probability of flood damage from winter blockage of a certain drawbridge. The instructions state that the city is legally negligent if the foreseeable probability of the damage is greater than 10%. 76% of the group, told only the background information that the city actually knew, decides that the flood is too unlikely. If you are given the information that the city knew, plus the fact that the flooding actually occurred, 57% of the group decides that the city was legally negligent because the foreseeable probability was high enough.
The third group, not shown here, which was instructed to try and ignore hindsight bias—in other words, you are not to take into account that the flood actually occurred in deciding what the foreseeable probability was. 56% of that group decided the city was legally negligent. The jury instruction to ignore post-facto information has no effect on what the jury actually decides. You cannot compensate for hindsight bias by being told to compensate for hindsight bias—it is an unconscious process. The effect of hindsight bias is that we vastly overestimate how well we understand history, because whenever something happens that event is in a sense testing our model of history. If it is something we wouldn’t have expected, that means that our model of the world as a whole is wrong. If, on the other hand, we think we would have expected it, then we are vastly overestimating how well our model fits the facts. For example, after the real estate collapse you find whole floods of people talking about how obvious the real estate collapse was, and yet very few of them actually made any money betting against the real estate collapse in advance.
