Chapter 2. Heuristic-Driven Bias: The First Theme

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 13-23(11)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic-driven bias. The chapter describes these biases using behavioral concepts such as availability, representativeness, anchoring-and-adjustment, overconfidence, and aversion to ambiguity. Examples are provided to illustrate how these concepts affect the manner in which investors form predictions.

Keywords: regression to the mean; heuristic-driven bias; overconfidence; representativeness; availability; conservatism; aversion to ambiguity; heuristic; anchoring and adjustment

Document Type: Research article

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