Representativeness Heuristic
What is Representativeness Heuristic? Representativeness heuristic bias occurs when the similarity of objects or events confuses people’s thinking regarding the probability of an outcome. People frequently make the mistake of believing that two similar things or events are more closely correlated than they actually are. This representativeness heuristic is a common information processing error in...
Hindsight Bias
What is Hindsight Bias? Hindsight bias is the misconception, after the fact, that one “always knew” that they were right. Someone may also mistakenly assume that they possessed special insight or talent in predicting an outcome. This bias is an important concept in behavioral finance theory. Hindsight Bias Example Consider the 2008 financial crisis or...
Confirmation Bias
What is Confirmation Bias? Confirmation bias is the tendency of people to pay close attention to information that confirms their belief and ignore information that contradicts it. This is a type of bias explored in behavioral finance. Our biases tend to limit our ability to make purely rational investment decisions. Confirmation Bias Example Let’s look...
Anchoring Bias
What is Anchoring Bias? Anchoring bias occurs when people rely too much on pre-existing information or the first information they find when making decisions. For example, if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap. Whereas,...
Narrative Fallacy
What is the Narrative Fallacy? One of the limits to our ability to evaluate information objectively is what’s called the narrative fallacy. We love stories and we let our preference for a good story cloud the facts and our ability to make rational decisions. This means that we may be drawn towards a less desirable...
