Heuristics & Biases

Question 1

Types of Heurisitcs

Answer 1

Autonomic & non-cognitive

Question 2

Representativeness

Answer 2

People judge probabilities to which A is representative of B

Question 3

Behaviours of Representativeness

Answer 3

• conjunction fallacy
• base rate neglect & baye’s rule
• hot hand phenomenon
• gambler’s fallacy
• overestimating predictability
• biases

Question 4

Anchoring

Answer 4

People initially anchored on their prior beliefs

Question 5

Anchoring v Representativeness

Answer 5

• anchoring -> new info discounted
• representativeness -> too influenced by new info
• conflict in handling of new info
• people are coarsely calibrated

Question 6

Home Bias

Answer 6

Domestic investors overweight domestic stock due to:
- excessive optimism
- familiarity
- institutional restriction

Informational advantage:
- more info more accurate value
- better monitoring
- access to pvt info

Question 7

Biases

Answer 7

Recency:
- weight new evidence more heavily
Salience:
- weight dramatic evidence over objective evidence
Availability:
- freely available, easily process info more compelling

Question 8

Conjunction fallacy

Answer 8

When people have no notion on the difference between simple probabilities & joint probabilities

Question 9

Hot hand phenomenon

Answer 9

Believe the sample should represent the population/distribution and vice versa

Question 10

Gambler’s fallacy

Answer 10

If sure about the nature of the population, people think small samples should always look like the population

Question 11

Overestimating predictability

Answer 11

Tendency to underestimate regression to mean which leads to exaggerating predictability - generalise outliers to the mean