Representativeness heuristic causes investors to rely on stereotypes rather than data from "summary" of The Little Book of Behavioral Investing by James Montier
The representativeness heuristic is a mental shortcut that allows people to make decisions quickly based on stereotypes rather than taking the time to analyze data. This cognitive bias can lead investors to rely on familiar patterns and preconceived notions rather than objective information when making investment decisions. By using stereotypes as a basis for decision-making, investors may overlook important data that could provide a more accurate picture of the situation.
Investors who fall prey to the representativeness heuristic may be swayed by superficial similarities between a current investment opportunity and past successful ventures. They may believe that history will repeat itself without considering the specific circumstances that could lead to a different outcome. This can lead to missed opportunities or costly mistakes that could have been avoided with a ...
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