The role of heuristics in shaping investor behavior from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
Heuristics play a crucial role in shaping investor behavior. These mental shortcuts are used by individuals to make decisions quickly and efficiently, especially in situations of uncertainty or complexity. While heuristics can be useful in simplifying the decision-making process, they can also lead to biased judgments and suboptimal outcomes. One common heuristic that influences investor behavior is representativeness. Investors often make decisions based on how closely an investment opportunity resembles a familiar pattern or stereotype. This can lead to overreliance on past experiences and neglect of relevant information, resulting in suboptimal investment choices. Another heuristic that impacts investor behavior is availability. Investors tend to give more weight to information that is readily available to them, such as recent news or personal experiences. This ...
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