In Rational Choice in an Uncertain World, Robyn Dawes describes an experiment by Tversky:¹

Many psychological experiments were conducted in the late 1950s and early 1960s in which subjects were asked to predict the outcome of an event that had a random component but yet had base-rate predictability—for example, subjects were asked to predict whether the next card the experimenter turned over would be red or blue in a context in which 70% of the cards were blue, but in which the sequence of red and blue cards was totally random.
In such a situation, the strategy that will yield the highest proportion of success is to predict the more common event. For example, if 70% of the cards are blue, then predicting blue on every trial yields a 70% success rate.
What subjects tended to do instead, however, was match probabilities—that is, predict the more probable event with the relative frequency with which it occurred. For example, subjects tended to predict 70% of the time that the blue card would occur and 30% of the time that the red card would occur. Such a strategy yields a 58% success rate, because the subjects are correct 70% of the time when the blue card occurs (which happens with probability .70) and 30% of the time when the red card occurs (which happens with probability .30); (.70×.70) + (.30×.30) = .58.
In fact, subjects predict the more frequent event with a slightly higher probability than that with which it occurs, but do not come close to predicting its occurrence 100% of the time, even when they are paid for the accuracy of their predictions . . . For example, subjects who were paid a nickel for each correct prediction over a thousand trials . . . predicted [the more common event] 76% of the time.

Do not think that this experiment is about a minor flaw in gambling strategies. It compactly illustrates the most important idea in all of rationality.

Subjects just keep guessing red, as if they think they have some way of predicting the random sequence. Of this experiment Dawes goes on to say, “Despite feedback through a thousand trials, subjects cannot bring themselves to believe that the situation is one in which they cannot predict.”

But the error must go deeper than that. Even if subjects think they’ve come up with a hypothesis, they don’t have to actually bet on that prediction in order to test their hypothesis. They can say, “Now if this hypothesis is corr...

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