Thinking, Fast and Slow

by Daniel Kahneman

Recall that the correlation between two measures—in the present case reading age and GPA—is equal to the proportion of shared factors among their determinants. What is your best guess about that proportion? My most optimistic guess is about 30%. Assuming this estimate, we have all we need to produce an unbiased prediction. Here are the directions for how to get there in four simple steps: Start with an estimate of average GPA. Determine the GPA that matches your impression of the evidence. Estimate the correlation between your evidence and GPA. If the correlation is .30, move 30% of the distance from the average to the matching GPA. Step 1 gets you the baseline, the GPA you would have predicted if you were told nothing about Julie beyond the fact that she is a graduating senior. In the absence of information, you would have predicted the average. (This is similar to assigning the base-rate probability of business administration graduates when you are told nothing about Tom W.) Step 2 is your intuitive prediction, which matches your evaluation of the evidence. Step 3 moves you from the baseline toward your intuition, but the distance you are allowed to move depends on your estimate of the correlation. You end up, at step 4, with a prediction that is influenced by your intuition but is far more moderate. This approach to prediction is general. You can apply it whenever you need to predict a quantitative variable, such as GPA, profit from an investment, or the growth of a com...