3.
Confirmation Bias Confirmation bias is the tendency to search for, interpret, favor,
1. Bias
What is it?
Bias refers to a tendency to make decisions based on preconceived notions or emotional
reasoning rather than objective evidence. Biases can cloud judgment and lead to
decision-making that deviates from logical, rational behavior.
Impact on Market and Participants:
Biases can lead to market anomalies such as overvalued stocks, underperformance of certain
asset classes, and excessive volatility. They can also cause individual investors to make
decisions that are not in their best financial interests, such as holding losing investments too
long or trading too frequently.
Example:An investor might exhibit confirmation bias by paying attention only to financial news
that supports their belief that a particular stock is a good investment, ignoring any negative
information.
Related Bias:A related bias is the availability heuristic, where individuals make decisions based
on the information that is most readily available to them, rather than all relevant information.
2. Cognitive Dissonance
What is it?
Cognitive dissonance is the mental discomfort experienced when holding two or more
conflicting cognitions (ideas, beliefs, values, emotional reactions). People naturally seek
consistency in their beliefs and perceptions, so this conflict leads to discomfort.
Impact on Market and Participants:
In finance, cognitive dissonance can lead investors to make irrational financial decisions to
justify their previous actions. For instance, it can cause them to stick with poor investments to
avoid admitting an error, impacting portfolio performance negatively.
Example:
An investor who believes in ethical investing might continue holding shares of a highly profitable
tobacco company, rationalizing that the returns are being donated to health charities to alleviate
their dissonance.
Related Bias:
The self-serving bias, where individuals attribute positive outcomes to their own actions and
negative outcomes to external factors, is closely related and can interact with cognitive
dissonance.
5. Overconfidence
What is it?
Overconfidence bias occurs when someone has excessive confidence in their own answers to
questions or forecasts, often well beyond the actual accuracy of those answers. In finance, it's
the unwarranted faith in one's own intuitive judgment or financial acumen.
Impact on Market and Participants:
Overconfidence can lead to excessive trading, underestimation of risks, and inadequate
diversification. It can distort market predictions and fuel speculative bubbles when many traders
simultaneously overestimate their own trading skills or information accuracy.
Example:
A portfolio manager consistently outperforms the market over a few quarters and becomes
overconfident in their trading abilities. They start taking larger, unjustified risks, assuming they
can continue to outperform, potentially leading to significant losses.
Related Bias:Illusion of control, where individuals overestimate their ability to control events, ties
closely with overconfidence. Both can lead investors to believe they can influence or predict
market outcomes more accurately than they actually can.
6. Gambler's Fallacy
The gambler's fallacy is the erroneous belief that if an event occurs more frequently than normal
during a given period, it is less likely to happen in the future (or vice versa), under the mistaken
assumption that long-term outcomes must balance out in the short term.
Impact on Market and Participants:
In financial markets, this fallacy can lead to poor investment decisions based on the patterns of
prices or market movements that are actually random. Investors might misinterpret natural
volatility as cycles that need to "correct" themselves.
Example:
An investor notices that a stock has fallen in price five days in a row and decides to buy heavily,
assuming that it must go up the next day purely because it has fallen so much, which is not
necessarily true.
Related Bias:
The representativeness heuristic, where people judge the probability of an event based on how
much it resembles other events, can also play into this, as it leads to oversimplified and often
incorrect conclusions.
and recall information in a way that confirms one's preexisting beliefs or hypotheses. It's a type
of cognitive bias that involves focusing on information that aligns with your current thoughts
and disregarding information that contradicts them.
Impact on Market and Participants:
This bias can lead to market inefficiencies as it can cause an investor to overvalue their own
beliefs and undervalue opposing viewpoints. It can also result in herding behavior, where
investors collectively move in the same direction based on shared, biased beliefs.
Example:
An investor strongly believes that technology stocks will outperform the market. As a result, they
might only look at positive forecasts and performance data for tech companies, ignoring any
signs of potential downturns.
Related Bias:
A related bias is the anchoring bias, where individuals rely too heavily on the first piece of
information they receive (the "anchor") when making decisions, which can similarly limit their
consideration of opposing information.
4. Fama's Network Selectivity
Fama's Network Selectivity refers to the tendency of individuals to associate and exchange
information within a network of people who share similar beliefs or viewpoints. This bias is
particularly relevant in the context of information dissemination and belief reinforcement in
financial markets.
Impact on Market and Participants:
This selectivity can create echo chambers where information is not fully questioned or critically
analyzed, leading to groupthink. In financial markets, this can result in bubbles or overly
pessimistic market sentiments if the majority of a network shares overly optimistic or negative
views, respectively.
Example:
Investors in a day trading social media group may all believe in the imminent rise of a particular
stock. As they share success stories and positive news about the stock, they reinforce each
other's belief, possibly ignoring broader market signals that suggest otherwise.
Related Bias:
Confirmation bias closely relates here as individuals in these networks may continuously seek
and share information that confirms their collective beliefs, ignoring or rationalizing away any
contradictory evidence.
7. Probability Matching
Probability matching involves individuals trying to match the probability of an event's occurrence
with their responses, instead of choosing the action that maximizes their chances of success or
payoff. It is a decision-making strategy that often results in suboptimal outcomes.
Impact on Market and Participants:
In financial markets, this bias can lead investors to misallocate their investments based on
perceived probabilities, rather than optimizing based on expected outcomes. For example, they
might diversify their portfolio in a way that matches the perceived risk of each asset, rather than
focusing on the expected return relative to risk.
Example:An investor might think that technology stocks have a 60% chance of outperforming
this year, so they allocate 60% of their portfolio to technology stocks. However, this doesn't
necessarily maximize their expected return or minimize risk, as it ignores other factors like
correlation and volatility.
Related Bias:This is related to the conjunction fallacy, where people mistakenly believe that
specific conditions are more probable than a single general one.
8. Retrievability
Retrievability bias occurs when individuals are more likely to use information that is easily
retrievable from memory as a basis for making a decision. This often means that recent, vivid,
or emotionally charged information has a disproportionate impact on decisions.
Impact on Market and Participants:
This bias can lead to short-termism in investment decisions, where investors give undue weight
to recent events or information when making investment decisions. This can increase market
volatility and reduce the effectiveness of long-term investment strategies.
Example:
An investor may sell shares of an airline company immediately following news of a plane crash,
fearing a decline in the company’s stock price, even though historical data might show that such
events have minimal long-term impact on stock prices.
Related Bias:
The availability heuristic is closely related, as it describes a mental shortcut that relies on
immediate examples that come to a given person's mind when evaluating a specific topic,
concept, method or decision.
9. Mental Accounting
Mental accounting is the tendency for people to segregate money into separate accounts based
on a variety of subjective criteria, such as the source of the money or its intended use. People
often treat money differently depending on which mental account it's in, rather than considering
it as a whole.
Impact on Market and Participants:
This bias can lead to inefficient financial behaviors, such as failing to optimize savings (e.g.,
keeping money in a low-interest account while carrying high-interest debt). In investing, it might
lead to irrational trade and investment decisions based on how money is categorized.
Example:An investor receives a $5,000 tax refund and considers it "found money." They decide
to invest it in high-risk stocks, which they normally would avoid, because they view this money
as expendable compared to their regular savings.
Related Bias:Framing effect, where people react differently depending on how choices are
framed. This can interact with mental accounting, as the "framing" of money as a gift or bonus
can lead to different spending or investment behaviors compared to regular income.
10. Emotional Biases
What is it?
Emotional biases are spontaneous and uncontrollable influences that can distort an individual's
reasoning process and decision-making capabilities. These biases are driven by personal
feelings, rather than by facts, and they often result in irrational actions in financial contexts.
Impact on Market and Participants:
Emotional biases can lead to erratic market behaviors, such as panic selling during market
downturns or exuberant buying during bull markets without regard for underlying fundamentals.
These reactions can exacerbate market cycles and lead to increased volatility.
Example:
During a market crash, an investor might sell their well-performing stocks in a panic, fearing
further losses. This decision is driven by the immediate emotional response to market
conditions, not by a rational assessment of long-term investment goals.
Related Bias:
Disposition effect, where investors are more likely to sell assets that have increased in value,
while holding assets that have decreased in value, often due to emotional attachments or the
fear of realizing a loss.
13. Conspicuous Consumption
Conspicuous consumption refers to the practice of spending money on luxury goods and
services to publicly display economic power or social status, rather than out of actual need. This
behavior is often motivated by a desire for prestige or to emulate the wealthy.
Impact on Market and Participants:
This behavior can lead to economic inefficiencies and increased debt levels among consumers
who spend beyond their means. In the broader economy, it can drive demand for luxury goods,
affecting stock prices and market trends in sectors associated with high-end consumption.
Example:
An individual may purchase an expensive luxury car not because they need or can comfortably
afford it, but because they want to signal wealth or status to their peers. This decision is
influenced more by social pressures than by financial prudence.
Related Bias:
Social proof, which is the tendency to mimic the actions of others in an attempt to reflect
correct behavior for a given situation, supports the behaviors seen in conspicuous consumption.
14. Multiple Risk Aversion
Multiple risk aversion occurs when individuals are faced with multiple risks simultaneously and
react more conservatively than if they were facing a single risk. This can happen because the
complexity and uncertainty associated with multiple risks make them more averse to taking any
risk at all.
Impact on Market and Participants:
This behavior can lead to underinvestment in potentially profitable ventures or overly
conservative portfolio management. It can also cause markets to react more sharply to bad
news if it coincides with other uncertainties, leading to higher volatility.
Example:
An investor might hesitate to invest in a startup company that is not only in a high-risk tech
sector but also based in a politically unstable country. The combination of industry-related risk
and geopolitical risk makes the investor overly cautious.
Related Bias:
This is related to ambiguity aversion, where people prefer known risks over unknown risks.
When multiple risks are involved, the ambiguity increases, and so does the aversion.
11. Familiarity Bias
Familiarity bias occurs when investors prefer to invest in markets or companies they are familiar
with rather than exploring new options that could offer better returns. This bias leads to a
preference for domestic over foreign assets, well-known companies over lesser-known ones, or
industries that an investor understands well.
Impact on Market and Participants:
This bias can lead to poorly diversified investment portfolios that are more vulnerable to local or
industry-specific downturns. It also limits the potential for higher returns from more diverse or
risk-adjusted portfolios.
Example:
An investor consistently buys stocks from the tech industry simply because they work in tech
and understand it better than other sectors, ignoring potentially lucrative opportunities in other
areas like healthcare or energy.
Related Bias:
Home country bias is closely related, where investors show a strong preference for domestic
investments over foreign ones, often to their detriment in terms of risk and return diversification.
12. Decision Paralysis
Decision paralysis, also known as analysis paralysis, occurs when an individual is faced with so
many choices that they feel overwhelmed and unable to make a decision. This often results in
inaction or a delay in making important financial decisions.
Impact on Market and Participants:
Decision paralysis can cause investors to miss opportunities or fail to act on important financial
decisions, like rebalancing a portfolio or selling an underperforming asset. This inaction can
lead to financial losses or suboptimal investment growth.
Example:
A retiree looking to invest their pension might become overwhelmed by the array of investment
products available (stocks, bonds, mutual funds, ETFs) and end up leaving their money in a
low-interest savings account instead of making an investment decision.
Related Bias:
Overchoice, where too many options lead to difficulty in making a decision, is a factor
contributing to decision paralysis. It's particularly relevant in today’s financial markets, which
offer a vast array of investment choices and strategies.
15. Dollar Cost Averaging
Dollar cost averaging (DCA) is an investment strategy where an investor divides up the total
amount to be invested across periodic purchases of a target asset in an effort to reduce the
impact of volatility on the overall purchase. The purchases occur regardless of the asset's price.
Impact on Market and Participants:
DCA helps mitigate risk and can prevent investors from making poorly timed investment
decisions based on emotional responses to market fluctuations. However, it may also result in
lower returns compared to investing a lump sum at the right time, particularly in a consistently
rising market.
Example:
An investor decides to invest $200 in a mutual fund every month, rather than investing $2400 at
the beginning of the year. This strategy avoids the risk of investing a large amount at a high
price point but may miss out if the market trends upward quickly.
Related Bias:
While not directly a bias, DCA helps combat recency bias, where investors heavily weigh recent
experiences more than historical data.
16. Momentum and Reversal
Momentum investing is a strategy that aims to capitalize on the continuation of existing market
trends. It assumes that assets which have performed well will continue to perform well, and vice
versa. A reversal is when the market trend is expected to change direction.
Impact on Market and Participants:
Momentum strategies can lead to bubbles if too many investors pile into the same trending
assets, potentially driving prices above intrinsic values. Reversal strategies, on the other hand,
can be risky if timing the market change is incorrect.
Example:
A trader might buy stocks that have been rising over the past six months under the assumption
that they will keep increasing. Conversely, they might sell stocks that have been falling,
anticipating a continuation of the downtrend.
Related Bias:
This is related to herding behavior, where investors follow the actions of the majority without
independent analysis. Both momentum and reversal strategies can be influenced by herding.
17. Value Premium
The value premium refers to the greater risk-adjusted returns that can be earned by investing in
stocks that are considered undervalued compared to their fundamentals. Value stocks are those
that have lower price-to-earnings ratios and high dividend yields.
Impact on Market and Participants:
Investing in value stocks can provide higher returns over the long term, but these stocks can be
riskier and require a longer investment horizon. Misjudging the value of a stock can also lead to
losses if the perceived undervaluation is incorrect.
Example:
An investor might focus on purchasing stocks in a sector that has been beaten down and is
trading at low multiples of earnings, betting that the sector will rebound as the market corrects
overpricing in other areas.
Related Bias:
Overconfidence bias can intersect with the pursuit of value premiums, as investors may be
overly confident in their assessment of what constitutes an undervalued stock.
18. Survivorship Bias
What is it?
Survivorship bias is the logical error of concentrating on the people or things that made it past
some selection process and overlooking those that did not, often because of their lack of
visibility. In finance, this bias often manifests when evaluating the performance of funds or
investments without accounting for those that have failed or disappeared.
Impact on Market and Participants:
This bias can lead to overly optimistic beliefs about the success rates of investments, financial
strategies, or fund managers. It can cause investors to underestimate risk and potentially lead
to poor investment decisions based on incomplete data.
Example:
An investor might look at the performance of current mutual funds in the market, noticing high
returns. However, they fail to consider the numerous funds that failed and were dissolved, which
would have presented a more sobering and comprehensive picture of fund performance risks.
Related Bias:
Survivorship bias is closely related to selection bias, where the data or sample used may not be
representative of the whole, skewing results and conclusions.
21. Exceptional Error Hypothesis
What is it?
The Exceptional Error Hypothesis suggests that people tend to view their successes as more
predictable than they actually were after the fact (hindsight bias), and view their failures as less
predictable, attributing them to external factors.
Impact on Market and Participants:
This hypothesis can lead to an incorrect assessment of one's investment skills and
decision-making abilities. It encourages repeated risky behaviors under the false belief that past
success was due to skill rather than luck or external factors.
Example:
A trader who made a significant profit on a risky trade might believe that their success was due
to their trading strategy and foresight, ignoring the possible role of luck or favorable market
conditions that may not repeat.
Related Bias:
This concept is closely linked with the hindsight bias, where individuals see past events as
having been more predictable than they truly were.
19. Bubble
What is it?
A bubble is an economic cycle characterized by the rapid escalation of asset prices followed by
a contraction. Bubbles are typically driven by a surge in asset prices unwarranted by the
fundamentals of the asset and driven by exuberant market behavior.
Impact on Market and Participants:
When a bubble bursts, it can lead to devastating economic consequences for investors who
entered late, often resulting in widespread financial loss and market instability. This can affect
confidence in markets and lead to prolonged economic downturns.
Example:The Dot-Com Bubble of the late 1990s is a prime example, where excessive
speculation in Internet-related companies drove stock prices to unsustainable levels, which
eventually crashed and caused significant investor losses.
Related Bias:
Herding behavior and overconfidence are key biases that contribute to bubble formation, as
investors follow the crowd into booming assets and become overly confident about the
continuation of their rising value.
20. Black Swan
What is it?
Black swan events are unpredictable events that have massive impacts. In finance, these events
are typically outside the realm of normal expectations and have potentially severe
consequences. The term was popularized by Nassim Nicholas Taleb to describe the fragility of
financial systems to such events.
Impact on Market and Participants:
Black swan events can cause catastrophic losses for unprepared markets and investors. They
challenge standard financial theories which often fail to account for such extreme outliers,
affecting risk assessment and management.
Example:The 2008 financial crisis was triggered by a collapse in the U.S. housing market, an
event that many market models and experts considered highly unlikely or impossible, and yet it
had devastating global effects.
Related Bias:
This is related to the normalcy bias, where people underestimate the possibility of a disaster
and its potential effects, assuming that things will always function the way they normally have.
1. Confirmation Bias
● Definition: Tendency to favor information that confirms existing beliefs.
● Impact: Leads to skewed decision making by ignoring contradicting information.
● Example: An investor might ignore negative news about a favored stock.
2. Overconfidence Bias
● Definition: Overestimation of one's own judgment or abilities.
● Impact: Can result in taking excessive risks based on unfounded beliefs in personal ability.
● Example: A trader makes large, risky trades thinking they can outguess the market.
3. Loss Aversion
● Definition: Tendency to prefer avoiding losses over acquiring equivalent gains.
● Impact: Can result in holding losing investments too long to avoid realizing a loss.
● Example: An investor holds on to a declining stock, hoping it will break even.
4. Anchoring Bias
● Definition: Relying too heavily on the first piece of information (the "anchor") when making
decisions.
● Impact: May lead to under-adjusting from initial values, affecting pricing and forecasting.
● Example: An investor sticks to the first price they see for a stock, ignoring subsequent lower
prices.
5. Herding Behavior
● Definition: Copying the actions of a larger group, irrespective of one's own beliefs.
● Impact: Can create bubbles or crashes due to collective movement into or out of stocks.
● Example: Buying a stock just because it's popular and everyone else is buying it.
6. Mental Accounting
● Definition: Treating money differently depending on its origin or intended use.
● Impact: Leads to inefficient financial decisions, like not using "fun money" to pay down debt.
● Example: Treating a tax refund as a windfall to be splurged rather than saved or invested.
7. Framing Effect
● Definition: Making decisions based on how information is presented rather than just content.
● Impact: Affects investment choices and financial planning, can lead to inconsistent decisions.
● Example: Opting in vs. opting out framing in retirement saving plans leads to different
participation rates.
8. Hindsight Bias
 ● Definition: Believing after an event that one had predicted or expected the outcome.
● Impact: Can lead to overconfidence in one's predictive abilities and poor future decision-making.
● Example: Believing after a stock has increased in value that one knew it was going to happen.
9. Prospect Theory
● Definition: People value gains and losses differently, leading to decisions based on perceived
gains rather than actual outcomes.
● Impact: Can lead to risk-averse choices in profits and risk-seeking in losses.
● Example: Preferring a sure gain of $50 over a 50% chance to gain $100.
10. Endowment Effect
● Definition: Valuing an owned asset more highly simply because one owns it.
● Impact: Leads to holding assets longer than is economically beneficial.
● Example: An investor refuses to sell a stock they own at market price, believing it to be
undervalued.
11. Availability Heuristic
● Definition: Overestimating the importance of information that is readily available.
● Impact: Leads to biased decisions based on recent news or personal experiences.
● Example: Investing heavily in disaster insurance immediately after a natural disaster.
12. Status Quo Bias
● Definition: Preference for the current state of affairs, resisting change.
● Impact: Leads to portfolios that may not be diversified or updated according to changing market
conditions.
● Example: Sticking with the same investments or strategies simply because they are familiar.
13. Ambiguity Aversion
● Definition: Avoiding options where the probability of outcomes is unknown.
● Impact: May prevent investors from taking on investments with potentially high returns but
unclear risks.
● Example: Avoiding investing in a new but potentially revolutionary technology due to uncertain
prospects.
14. Disposition Effect
● Definition: The tendency to sell assets that have increased in value, while keeping assets that
have decreased in value.
● Impact: Can lead to suboptimal investment returns by selling winners too early and holding losers
too long.
● Example: An investor sells a stock after a small gain but holds another that has been steadily
losing value, hoping it will rebound.
● Impact: Can lead to inflated asset bubbles or unnecessary sell-offs.
● Example: Investing in cryptocurrencies simply because they see others making high returns, not
due to understanding the underlying value.
22. Zero-risk Bias
● Definition: Preference for reducing a small risk to zero over a greater reduction in a larger risk.
● Impact: Leads to poor allocation of resources, such as over-insuring minor risks while ignoring
major ones.
● Example: Buying extensive warranties for small household appliances but not having adequate
health insurance.
23. Endowment Effect
● Definition: The tendency for individuals to value an owned object higher than its market value
simply because they own it.
● Impact: Leads to holding onto assets longer than is financially advisable.
● Example: An investor refuses to sell a stock at a fair market price because they feel a personal
attachment to it.
24. Conjunction Fallacy
● Definition: The error of assuming that specific conditions are more probable than a single general
one.
● Impact: Can lead to overly specific investment strategies that do not account for broader market
conditions.
● Example: An investor believes that a tech stock must rise on the day after both a product launch
and a positive earnings report, despite these being independent events.
25. Affect Heuristic
● Definition: Making a decision based on the emotional response to a stimulus rather than a
rational assessment.
● Impact: Leads to investment decisions that are influenced more by emotions than by financial
data.
● Example: Buying a stock because the investor feels good about the company's brand, ignoring its
poor financial health.
26. Escalation of Commitment
● Definition: Continuing a previously chosen (often unprofitable) course of action just because of
the time and resources already invested.
● Impact: Leads to further investment in losing propositions, compounding losses.
● Example: An investor continues to invest in a failing business because they have already invested
substantial sums, hoping to recover their initial investment.
27. Availability Bias
● Definition: Overestimating the importance of information that is readily available.
15. Gambler’s Fallacy
● Definition: The belief that future probabilities are altered by past events, when in reality they are
unchanged.
● Impact: Can lead to poor investment decisions based on the incorrect assumption that a
"correction" is due.
● Example: After seeing a stock decline for several days in a row, an investor might buy it, wrongly
assuming it must go up next.
16. Recency Bias
● Definition: Overemphasizing recent experiences or events when making decisions about the
future.
● Impact: Leads to reactive investment strategies that may ignore long-term trends.
● Example: An investor may overweight recent economic downturns and overly conservatively
invest in bonds.
17. Base Rate Neglect
● Definition: Ignoring statistical base rates in favor of anecdotal evidence or vivid data.
● Impact: Can lead to misjudgment of financial risks and rewards.
● Example: Ignoring the typical performance of stock markets over decades and focusing instead
on recent market crashes.
18. Hyperbolic Discounting
● Definition: Valuing more immediate payoffs disproportionately higher than future payoffs.
● Impact: Leads to short-termism in investment decisions and under-investment in long-term gains.
● Example: Choosing to receive $100 today rather than $120 in a year.
19. Illusion of Control
● Definition: The belief that one can influence outcomes over which they have no actual control.
● Impact: Can encourage riskier behaviors in investing, under the false assumption of influence.
● Example: A trader believes that by watching financial news all day, they can predict short-term
market movements and make profitable trades.
20. Narrative Fallacy
● Definition: Creating a story or pattern from disconnected or incomplete data.
● Impact: Leads to oversimplified and often misleading financial analysis.
● Example: An investor buys a stock because they believe in a compelling story about the
company’s future, despite lacking evidence.
21. Bandwagon Effect
● Definition: Doing something primarily because many others are doing it, regardless of one’s own
beliefs, which may be overshadowed by the group’s actions.
● Impact: Can cause investors to make decisions based on recent news rather than long-term
trends.
● Example: An investor overweights the risk of airline stocks because of recent news about a plane
crash.
28. Sunk Cost Fallacy
● Definition: Continuing a behavior or endeavor as a result of previously invested resources (time,
money, or effort).
● Impact: Prevents rational decision-making and efficient management of investments.
● Example: Continuing to hold a stock that is consistently underperforming just because a lot has
been invested in it.
29. Diversification Bias
● Definition: The tendency to over-diversify when given more options.
● Impact: Can lead to a dilution of potential returns due to over-diversification beyond the point of
optimal risk reduction.
● Example: An investor holds a portfolio of 100 different stocks, many of which provide overlapping
exposures and no additional risk reduction.
30. Ostrich Effect
● Definition: Ignoring negative financial information by "burying one's head in the sand," similar to
the mythical behavior of ostriches.
● Impact: Delays necessary financial decisions, potentially worsening financial situations.
● Example: An investor ignores their financial statements and market downturns, hoping problems
will resolve themselves.
31. Planning Fallacy
● Definition: Underestimating the time, costs, and risks of future actions while overestimating the
benefits.
● Impact: Leads to overly optimistic financial projections and inadequate risk management.
● Example: An entrepreneur underestimates the capital required to start a business, leading to
funding shortfalls.
32. Representativeness Heuristic
● Definition: Making judgments about the probability of an event under uncertainty, which is based
on how similar it is to the stereotypes of similar occurrences.
● Impact: Can lead to incorrect assumptions in financial forecasting and investment selection.
● Example: Assuming a new tech startup will succeed because it resembles other successful
startups, without considering its own merits or challenges.