Investor's Psychology

Representativeness Bias: When Your Past Affects your Future

Created on 29 Aug 2022

Wraps up in 5 Min

Read by 1.1k people

Updated on 10 Sep 2022

“There are many counterintuitive and surprising ways companies can boost users' motivation or increase their ability by understanding heuristics – the mental shortcuts we take to make decisions and form opinions.” 

― Ryan Hoover

People frequently depend on the representativeness heuristic without even realizing it. As a result, people arrive at conclusions without conducting the proper research, basing their decisions on past experiences instead. Representative heuristic means evaluating the probability of certain events which are uncertain. It includes forming opinions by comparing things based on preconceived notions. 

Sometimes this bias can speed up the decision-making process. However, it can also result in incorrect decisions and stereotyping. This article explains the representativeness bias or representativeness heuristic and how it operates and influences some actions and decisions.

What is the Definition of the Representativeness Heuristic? 

The representativeness heuristic defines how individuals estimate the probability of a specific event. A heuristic is a mental shortcut that can facilitate decision-making but can lead to an incorrect or delusional understanding of facts. People frequently lack access to reliable, comprehensive, general statistical information. Instead, they rely on too simplistic worldviews and prior experiences.

Studies with a limited sample size frequently influence the decisions of individuals. An example of this is the prior probability of specific events, such as the possibility of getting involved in a car accident or winning the lottery.

Why Does the Representativeness Bias Occur?

A representativeness bias can arise due to a variety of causes, including the following: 

  • Mental prototypes: Individuals navigate through life using information based on their personal experience and what they have learned from various sources. These models do not account for the different factors that affect reality, resulting in incorrect decision-making. 

  • Efficiency: Most individuals simply don't evaluate the statistical probability of certain events. In such cases, they rely on mental shortcuts to make decisions. Needless to say, decisions taken without accounting for the data and those taken impulsively can turn out to be wrong.

  • Resemblance: People understand the causes and consequences that resemble one another quicker than unrelatable events. For instance, when they find themselves in a situation previously experienced, they can easily assume that the previously experienced event is statistically more frequent than others, even though it is not the case. 

Is it a Dilemma or a Choice? 

Every situation requires an individual to identify the best responses and then pick the best one to achieve the desired goal. An individual relies on the cognitive processes of their brain to pick a plan of action or form a belief based on existing information in the brain before making every choice. There are several styles or schools of thought for decision-making processes.

The difficulty with the representativeness heuristic is that representativeness has nothing to do with probability, yet we place more importance on it than on relevant information. Prior probability, i.e., how prevalent something is in general, is an example of this data. At least in the United States, there are much more farmers than librarians. This means that, in statistical terms, it is never true to assert that Steve is "more likely" to be a librarian, regardless of his personality or demeanor. 

Example of Representativeness Bias in Financial Markets

An example of representativeness bias in the financial markets is when investors naturally think that excellent firms make good investments. However, this is not always the case. A corporation may be exceptional in its own business but a terrible judge of other companies. 

Another example is analysts who predict future outcomes based on past performance. The fact that a firm has had rapid growth over the previous five years does not always indicate that this trend will continue eternally.

Why Representative Bias Matters

The representativeness heuristic is prevalent and can significantly impact several decisions and judgments in the real world. In many instances, this can result in poor decisions with severe repercussions. 

1. Criminal justice: Jurors may determine whether a person is guilty or not depending on the degree to which a defendant resembles their understanding of a "guilty" suspect or the resemblance of his offense to a specific criminal category. For instance, a person accused of kidnapping a toddler for ransom may be considered more culpable than someone accused of kidnapping an adult for no payment. 

2. Healthcare: Doctors and other healthcare professionals may make diagnostic and treatment decisions depending on the degree to which patients and their symptoms resemble an existing prototype. This might, unfortunately, cause experts to exaggerate similarities and disregard other pertinent facts.   

3. Interpersonal perceptions: This heuristic can also influence the evaluations we make about other individuals. We tend to form preconceived notions about how individuals in specific jobs should act. For instance, a farmer may be perceived as hardworking, outdoorsy, and rough. Conversely, a librarian may be perceived as calm, orderly, and restrained. 

4. Stereotypes: Since individuals are so prone to relying on stereotypes to influence their judgments, it can lead to bias and other issues.

Representativeness Heuristic Examples

Real-world applications of the Representativeness Heuristic can be instructive. Consider the following examples: 

1. Work: The heuristic can influence workplace decisions. In one study, researchers discovered that managers made biased judgments more than 50% of the time, with many decisions based on representativeness bias. 

2. Social relationships: When we encounter new people, representativeness might alter our initial evaluations of them. It may cause us to acquire untrue opinions about people.

3. Political choices: This heuristic can also influence how individuals vote and which politicians they support. A person may support political candidates because they fit their mental image of a great leader without really understanding the candidates' agenda. 

How to Prevent

The Representative Heuristic Definition of Psychology is difficult to ignore, but there are steps you may take to reduce its influence. This can assist you in making more correct decisions in your daily life. Here are your options: 

  • According to Kahneman's research, when people become aware that they are adopting the representativeness heuristic, they can typically correct themselves and make more accurate assessments. 

  • Examine your judgments for signs of bias. Consider for a minute how your biases may influence your choices when you judge people or situations.

  • Use reasoning to solve problems. As you address challenges, you should emphasise logical thought. In addition, learning more about critical thinking and logical fallacies might be beneficial. 

  • It can be challenging to identify the use of representativeness in one's thinking; thus, it is occasionally helpful to get input from others. Explain your reasoning and invite them to identify any potential biases.

The Bottom Line 

“Each of your brains creates its myth about the universe.” 

― Abhijit Naskar, Neuroscientist

Representativeness bias can expedite decision-making. However, it misses several elements that are not readily apparent. You cannot eliminate prejudice, but the next time you make an important decision, remember that your internal system might play tricks on you. If you want more information, you can check out the Finology blogs. Do let us know your thoughts in the comment box!

An Article By -

Deb P Samaddar

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Deb is a keen learner and eager to learn about the finance world. He is that person who would never stop talking, but my oh my, the words he uses, are not something a normal human would in a regular conversation. While the conversations are well, interesting, the write-ups are faultless. With an increased proclivity towards tech and language, he aims to capitalise on his interests as a content writer at Finology.

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