How do investors make predictions? Insights from analogical reasoning research

Previous work on investor decision making has focused almost exclusively on information specific to the company being judged. Consequently, every decision is viewed as a novel event, disconnected from the investor's existing knowledge. In this study, the analogical reasoning literature provides the theoretical support for arguing that investors frequently utilize existing knowledge as a basis for generating predictions about a company's future. The specific proposal is that investors transfer their existing knowledge via two different forms of analogical reasoning. The first, relational reasoning, is based primarily on structural correspondence between a novel company and an existing schema. The second, literal similarity reasoning, is based primarily on surface correspondence of a novel company and a previously encountered company. Our theoretical framework is tested in a study in which experienced investors predict the outcome of a novel company's strategy after reading about the experiences of other companies who implemented a similar strategy. The results are consistent with the occurrence of both relational and literal similarity reasoning, with relational reasoning emerging as the dominant approach to generating investors' predictions. Copyright © 2000 John Wiley & Sons, Ltd.     

Rational Comprehension of Arguments in Theoretical Texts: A Program for an Argumentative-Linguistic Approach

A method of linguistically-oriented reasoning comprehension is proposed. It is based on semiological principles of text comprehension. Both content and form are essential for comprehending argumentative texts. A text recipient is viewed as a rational judge trying to detect all the components of the argument he/she considers and thus to see if the argument is consistent. Elementary and higher level argumentative units of the text are discovered by applying a modified S. Toulmin's model of argumentative functions. Validity and correctness of arguments are established by means of a new – linguistic – interpretation of traditional syllogistic.     

Reasoning with quantifiers

In the semantics of natural language, quantification may have received more attention than any other subject, and one of the main topics in psychological studies on deductive reasoning is syllogistic inference, which is just a restricted form of reasoning with quantifiers. But thus far the semantical and psychological enterprises have remained disconnected. This paper aims to show how our understanding of syllogistic reasoning may benefit from semantical research on quantification. I present a very simple logic that pivots on the monotonicity properties of quantified statements--properties that are known to be crucial not only to quantification but to a much wider range of semantical phenomena. This logic is shown to account for the experimental evidence available in the literature as well as for the data from a new experiment with cardinal quantifiers ("at least n" and "at most n"), which cannot be explained by any other theory of syllogistic reasoning.     

Against Teleological Essentialism

In two recent papers, Rose and Nichols present evidence in favor of the view that humans represent category essences in terms of a telos, such as honey-making, and not in terms of scientific essences, such as bee DNA. Here, I challenge their interpretation of the evidence and show that it is directly predicted by the main theory they seek to undermine. I argue that their results can be explained as instances of diagnostic reasoning about scientific essences.     

Salience Versus Proportional Reasoning: Rethinking the Mechanism Behind Graphical Display Effects

Two experiments examined predictions from two separate explanations for previously observed display effects for communicating low‐probability risks: foreground:background salience and proportional reasoning. According to foreground:background salience, people's risk perceptions are based on the relative salience of the foreground (number of people harmed) versus the background (number of people at risk), such that calling attention to the background makes the risk seem smaller. Conversely, the proportional reasoning explanation states that what matters is whether the respondent attends to the proportion, which conveys how small the risk is. In Experiment 1, we made the background more salient via color and bolding; in contrast to the foreground:background salience prediction, this manipulation did not influence participants' risk aversion. In Experiment 2, we separately manipulated whether the foreground and the background were displayed graphically or numerically. In keeping with the proportional reasoning hypothesis, there was an interaction whereby participants given formats that displayed the foreground and background in the same modality (graphs or numbers, thereby making the proportion easier to form) saw the probability as smaller and were less risk averse than participants given the information in different modalities. There was also a main effect of displaying the background graphically, providing some support for foreground:background salience. In total, this work suggests that the proportional reasoning account provides a good explanation of many display effects related to communicating low‐probability risks, although there is some role for foreground:background salience as well. Copyright © 2018 John Wiley & Sons, Ltd.     

Real Objects Can Impede Conditional Reasoning but Augmented Objects Do Not

In this study, Knauff and Johnson‐Laird's (2002) visual impedance hypothesis (i.e., mental representations with irrelevant visual detail can impede reasoning) is applied to the domain of external representations and diagrammatic reasoning. We show that the use of real objects and augmented real (AR) objects can control human interpretation and reasoning about conditionals. As participants made inferences (e.g., an invalid one from "if P then Q" to "P"), they also moved objects corresponding to premises. Participants who moved real objects made more invalid inferences than those who moved AR objects and those who did not manipulate objects (there was no significant difference between the last two groups). Our results showed that real objects impeded conditional reasoning, but AR objects did not. These findings are explained by the fact that real objects may over‐specify a single state that exists, while AR objects suggest multiple possibilities.     

Fallacies

Fallacies are things people commit, and when they commit them they do something wrong. What kind of activities are people engaged in when they commit fallacies, and in what way are they doing something wrong? Many different things are called fallacies. The diversity of the use of the concept of a fallacy suggests that we are dealing with a family of cases not related by a common essence. However, we suggest a simple account of the nature of fallacies which encompasses them all, viz., the term “fallacy” is our most general term for criticizing any general procedure used for the fixation of beliefs that has an unacceptably high tendency to generate false or unfounded beliefs, relative to that method of fixing beliefs. Very different sorts of things called fallacies are examined in the light of this account, e.g., denying the antecedent, circular arguments, so-called informal fallacies, and propositions said to be fallacies. We do not provide a theory of fallacies. Still, on our account pretty much all of those things that have been called fallacies are fallacies, and they have been called fallacies for pretty much the same reasons.     

Causal Networks or Causal Islands? The Representation of Mechanisms and the Transitivity of Causal Judgment

Knowledge of mechanisms is critical for causal reasoning. We contrasted two possible organizations of causal knowledge—an interconnected causal network, where events are causally connected without any boundaries delineating discrete mechanisms; or a set of disparate mechanisms—causal islands—such that events in different mechanisms are not thought to be related even when they belong to the same causal chain. To distinguish these possibilities, we tested whether people make transitive judgments about causal chains by inferring, given A causes B and B causes C, that A causes C. Specifically, causal chains schematized as one chunk or mechanism in semantic memory (e.g., exercising, becoming thirsty, drinking water) led to transitive causal judgments. On the other hand, chains schematized as multiple chunks (e.g., having sex, becoming pregnant, becoming nauseous) led to intransitive judgments despite strong intermediate links ((Experiments 1–3). Normative accounts of causal intransitivity could not explain these intransitive judgments (Experiments 4 and 5).     

Predicting Political Biases Against the Occupy Wall Street and Tea Party Movements

Accusations of hypocrisy have flown against both supporters and opponents of the Occupy Wall Street (OWS) and Tea Party movements. Integrating the ideologically objectionable premise model (IOPM), a newly devised model of political judgment, with political tolerance research, we find that how the political activities of OWS and Tea Party demonstrators are described determines whether or not biases against these groups emerge among people low and high in right‐wing authoritarianism (RWA). Specifically, people low in RWA were more biased against the Tea Party than OWS regardless of whether the groups engaged in normatively threatening or reassuring political behavior, whereas people high in RWA were more biased against OWS than the Tea Party when the groups engaged in normatively threatening (and therefore objectionable), but not normatively reassuring (and therefore acceptable) behavior. These findings further support the IOPM's contention that premise objectionableness, not right‐wing orientation, determines biases in political judgment.     

The Wished‐For Always Wins Until the Winner Was Inevitable All Along: Motivated Reasoning and Belief Bias Regulate Emotion During Elections

How do biases affect political information processing? A variant of the Wason selection task, which tests for confirmation bias, was used to characterize how the dynamics of the recent U.S. presidential election affected how people reasoned about political information. Participants were asked to evaluate pundit‐style conditional claims like “The incumbent always wins in a year when unemployment drops” either immediately before or immediately after the 2012 presidential election. A three‐way interaction between ideology, predicted winner (whether the proposition predicted that Obama or Romney would win), and the time of test indicated complex effects of bias on reasoning. Before the election, there was partial evidence of motivated reasoning—liberals performed especially well at looking for falsifying information when the pundit's claim predicted Romney would win. After the election, once the outcome was known, there was evidence of a belief bias—people sought to falsify claims that were inconsistent with the real‐world outcome rather than their ideology. These results suggest that people seek to implicitly regulate emotion when reasoning about political predictions. Before elections, people like to think their preferred candidate will win. After elections, people like to think the winner was inevitable all along.