Heuristics are essentials; without them it would be impossible to make the decisions required to get through a normal day.
They allow people to cope with information and computation overload and to deal with risk, uncertainty and ignorance.
Unfortunately, these heuristics can sometimes result in tendencies to do certain things that are dysfunctional.
Everyone must be careful not to fall prey to certain (often dysfunctional) tendencies.
In the context of human activities that were not a part of most of our evolutionary past as a species, such as investing, heuristics can produce one mistake after another.
"Individuals tend to extrapolate heuristics from situations where they make sense to those where they do not."
Heuristics conserve scarce mental and physical resources, but the same process, which is sometimes beneficial, can lead people to harmful systemic errors.
An approach to risk: Probability of loss X the amount of possible loss versus Probability of gain X the amount of possible gain.
If the amount of loss is massive even if the probability was small, rationality should overcome psychological denial, optimism, and other negative decision-making tendencies.
The reality is that we all tell ourselves false stories to avoid the truth.
Even if you spend a lot of time studying behavioural economics, you can only improve your skills on the margin. You will always make mistakes.
If you understand dysfunctions that are caused by behavioural economics phenomena and the other person does not, then you have a potential edge.
The best Graham value investors spend a lot of time thinking about possible sources of dysfunctional decision-making and emotional errors.
Other people's errors create opportunities for the Graham value investor.
"There is a lot of behavioural finance confirming Ben Graham's original judgment." (Professor Bruce Greenwald of Columbia Business School.)
You will need to deal with heuristics like mental accounting, sunk cost, ambiguity, regret and framing, just to name a few in your investing journey.