Well, so the most frequent answer to the first question is 45%, right?

The probability that you would assign to the event that the selected bag contains

predominantly black chips, right.

Most people answer 45%.

Now the second question, is clearly much more difficult than the first, right?

And the two most common answers that we get to these questions,

is either 45% or 67%, why?

Because these are the most salient numbers in the problem, right.

45% is the number of bags containing predominantly black chips.

And 67% is the fractional black chips drawn with replacement, right?

So those who respond 45%, do not really know how to incorporate

the new information, so they stick with their initial beliefs.

And people who say 67%, focus on the fact that two-thirds of

the chips drawn with replacement are black, right.

And so they ignore all the prior information just like we saw with their

representative heuristic, right.

Now of course the correct answer to the second

question is in fact 96.04% right.

Now typically in experiments, right?

55% of those responding, right?

Choose either 45 or 67%, right?

Now the remaining are all over the place but

most are well below 96%, and in fact,

most of the people are below 75%.

Now what does this mean?

Think about it.

Well, what this means is, all right,

people respond to conservatively to the new information, right?

They are anchored on that 45%, number and

they do not adjust sufficiently to the new information, right?

Now this question is actually very analogous to the problem

faced by financial analysts, right?

So think of the bag,

a company that in the future may operate in the black or in the red, right?

Think of black chips standing for good future earnings.

And red chips for poor future earnings, right.

So you start out with some prior,

just like the analyst starts out with some information.

That leads them to form some initial beliefs, right.

Now, how does the analyst react after the earnings announcement,