Behavioral finance FAQ / Glossary (Range)

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Dates of related message(s) in the
Behavioral-Finance group (*): 

Year/month, d: developed / discussed,
i: incidental

Range estimate aversion

08/11d + see fuzzy logic,
numeracy bias, obedience to
framing, scenarios,
magical, Goodhardt law,
tunnel vision

Mr. Target, how can I shoot you if you don't stop wobbling!


The "range estimate aversion" is the - rather common -
by deciders to get or use a precise 

number (*) instead of a range of
estimated values or a choice of scenarios.

(*) Rather often a round number, rather in line with past evolutions.

Economic or financial forecasters or deciders tend
to fall into this reductive "cognitive trap" when doing, or
looking for, projections on:

GDP growth, public budget balance,

Company sales and profits,

Stock prices, exchange rates, interest rates,

commodity prices...


Horse blinders

Such a single estimate is a denial of

* the fuzziness and uncertainty of the real world (cf. "fuzzy

* and the need to contemplate the various possible evolutions and their
before deciding.

A single estimate is a caricature, a near childish approach of what should be
a range of detailed predictions that help decision making.

The deciders (and advisors) focus on just one thing that might or not

This tends to make them blind to other
(tunnel vision, mental myopia), or
unable to imagine them in advance just in case (plan B).

They neglect the idea that to throw more than one dart to a number table
gives a good chance to hit more than one number.

This bias distorts decision making:

It deprives of the knowledge that would be obtained by making
possible scenarios

Such scenarios are needed to build a full strategy  
that takes into account most contingencies (Plan B, C...)

It might give an illusion of certainty , for example it

might water down an investor's risk appreciation.

It might lead to anchoring (see that word) when those
    predictions become "reference points" (see that phrase).

In extreme cases, it can rest on the veneration of round
or magical numbers.

What could explain
     that cognitive / emotional bias?

Choosing a false certainty ?

So as to satisfy the mind, which finds more pleasant (or less
unpleasant)a fake certainty than even a grain of uncertainty ?

Or just tunnel vision and lazy extrapolation?

1) Several emotional factors might explain this tendency to reduce an
    estimate to a single-point:

Looking for certainty

The range aversion could be linked to the

uncertainty aversion.

Belief in a precise number avoids the unease of mental
doubts and

Precision, even when illusive, can make feel safe.

At least, it spares the brain the discomfort of having to choose among
possibilities (see indecision).

It makes decision easier and makes you sleep better.
At your own peril!

But a single estimate, that leads to an easy decision, just delays
the dopamine low or high, the neuronal pleasure or suffering surge.

That brain reaction will come later with a revenge if the final
outcome differs, either favorably or unfavorably from that estimate.

It might show a preference for a magical certainty.
   Here again to avoid discomfort and anguish there is some magical
in believing in a set number.

Fearing for one's skin

It allows the decider, if things turn bad, to attribute the
   responsibility to the expert

Here the decider shirks its job, which is not to obey experts but to
make choices

For the expert(s) , to give a precise number might result from
peer pressure (see that word),

An expert might also be tempted to choose the forecast that would
please the most its customers, fans or boss.

This can make practically all experts give similar
, a near consensus that leads to a very narrow range
of expected data, a very small standard deviation from the mean
(see distribution).
One consequence is that possible rare events, worst case scenarios
and plan B
are swept under the carpet!

Also an expert that is not overconfident in a single estimate and gives
instead a range of possibilities is usually seen by deciders as a
wavering incompetent advisor

2) On the cognitive side, to rely on a single number simplifies the
    reasoning and saves time:

It spares brain time and efforts, no?

It seems due to a confusion between precision and accuracy

(something also called the "precision bias"),

It gives a narrow, simple, easy to grasp, formulation.

This is a type of framing (see that word).

A form of lazy thinking also (see that phrase)

It can be also an anchoring (see that word) on an expected data, an

irrational approach whatever the prevision methods used to obtain it.

It could come from the belief in binary logic (it considers
there is only one truth, any other statement being false) taken as
central paradigm.

This reductionist simplicity is stange magic (see numeracy bias,
magical thinking), an escape from the real world, a place where
things are uncertain, variable and approximate
(cf. fuzzy logic).

More precisely, here comes the numeracy bias  it could result  from
abusive trust in past data and rough maths

     (correlations, regressions, probability laws)

The illusion is that those tools can identify precisely the odds, thus are
always predictive and eliminate uncertainty.

That belief is ever present, even when the equations in the model
extrapolate mathematically the recent situation - as if the world will
never change - instead of resting on a thorough multi-scenarios

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2)
enter your query in "search archives".

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This page last update: 10/08/15   

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