4 - Heuristics & Biases (Deck 2) Flashcards
What is the status quo bias?
The tendency to favour the current situation and resist change, even when change could lead to better outcomes. People often stick with default choices due to inertia, fear of loss, or effort avoidance. People are less likely to change their portfolio once they have one set up.
How can familiarity and related heuristics result in investors holding suboptimal portfolios?
Investors fail to rebalance their portfolios. People tend to stick with their original investments, even when market conditions change.
Investors hold onto stocks that are losing value. Status quo bias makes it emotionally hard to sell a losing stock, even when reinvesting elsewhere would be wiser.
What are some implications of familiarity and related heuristics on financial decision making?
- Holding suboptimal portfolios
- Stock familiarity bias
- Media & attention bias in financial markets
What is stock familiarity bias?
Investors favour stocks of companies they recognise.
Retail investors tend to buy stocks they are comfortable with, rather than evaluating all options objectively.
Institutional investors behave differently – they tend to avoid stocks with high brand recognition among retail investors, possibly because these stocks are overpriced due to familiarity bias.
What is media & attention bias in financial markets?
Stocks frequently mentioned in the media attract more investment, often inflating prices.
What are representativeness and related biases?
Heuristics that typically result in probability judgement error: thinking some event is more (or less) likely than it actually is based on a proper understanding of the situation.
What is representativeness?
The confidence that a sample from which evidence is generated is sufficiently similar to the intended population.
What is gambler’s fallacy?
The belief that a certain random event is more likely to happen if it has occurred less frequently than expected. It is negative autocorrelation in decision making. Decision-makers are less likely to repeat a decision they just made, even when the cases are independent. For example, “A coin has landed on heads five times in a row, the next flip must be tails!”
What is hot hand fallacy?
The belief that past success predicts future success. For example, “A player on a streak is more likely to keep scoring.”
What is conjunction fallacy?
The belief that a combination of events (A and B) is more likely than a single event (A) alone. The more a scenario fits our stereotype or narrative, the more “likely” it feels, even if it’s statistically less probable.
