Representativeness heuristic can result in inaccurate judgments from "summary" of Advances in Behavioral Finance by Richard H. Thaler
The representativeness heuristic is a mental shortcut that people use when making judgments about the probability of an event. Instead of carefully weighing all available information, individuals rely on how closely an event or object matches a particular prototype or stereotype. This cognitive shortcut can lead to inaccurate judgments because it overlooks important statistical information that may be relevant to the situation at hand. For example, individuals may erroneously believe that a coin is more likely to come up heads after a string of tails because they perceive it as balancing out. This flawed reasoning stems from the representativeness heuristic, which focuses on patterns and similarities rather than considering the random nature of coin flips. As a result, people may make decisions based on faulty assumptions and misinterpretations of probability. In the context of financial decision-making, the representativeness heuristic can lead investors astray by causing them to base their judgments on superficial similarities rather than underlying ...
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