Behavioural Finance: Heuristic-Driven Biases

The important heuristic-driven biases and cogniive errors that impair judgement are:

• Representativeness
• Overconfidence
• Anchoring
• Aversion to ambiguity
• Innumeracy

1. Representativeness

http://myinvestingnotes.blogspot.com/2008/09/heuristic-driven-biases.html

Representativeness refers to the tendency to form judgements based on stereotypes. For example, you may form an opinion about how a student would perform academically in college on the basis of how he has performed academically in school

2. Overconfidence

http://myinvestingnotes.blogspot.com/2008/09/heuristic-driven-biases-2.html

People tend to be overconfident and hence overestimate the accuracy of their forecasts. Overconfidence stems partly from the illusion of knowledge.

3. Anchoring

http://myinvestingnotes.blogspot.com/2008/09/heuristic-driven-biases-3-anchoring.html

After forming an opinon, people are often unwilling to change it, even though they receive new information that is relevant.

4. Aversion to Ambiguity

http://myinvestingnotes.blogspot.com/2008/09/heuristic-driven-biases-4-aversion-to.html

People are fearful of ambiguous situations where they feel that they have little information about the possible outcomes. In experiments, people are more inclined to bet when they know the probabilities of various outcomes than when they are ignorant of the same.

5. Innumeracy

http://myinvestingnotes.blogspot.com/2008/09/heuristic-driven-biases-5-innumeracy.html

People have difficulty with numbers.