Representative Bias In Decision Making

Representativeness Bias

Group 17

Madhurima Gandreti – 13020841076 ; Ajeet Torgalkar - 13020841184

Introduction

Heuristics- In the most basic terms, heuristics is a sort of mental short hand used in problem solving and decision making. We use heuristics when we make a decision or solve a problem by using a rule of thumb strategy in order to shorten the process.

Representativeness- Representativeness, in terms of problem solving and decision making, refers to an existing group or set of circumstance that exists in our minds as most similar to the problem or decision at hand. This allows for the mental short hand decision making that is typical of representativeness heuristics.

Representativeness Heuristic- The combined term then

The base rate fallacy can be observed when an attribute of an individual is assessed based solely upon the individual and not upon the rate at which the attribute occurs in the population. Misperception of randomness can also be a product of representativeness heuristics. In a random event where there is a 50/50 chance of either event occurring, people tend to feel that a more varied result is more likely than a more uniform result. This effect is sometimes referred to as the gambler’s fallacy, which is the belief that outcomes will tend to even out after several occurrences. The gambler’s fallacy takes shape as the idea that after several losses an individual is “due” a win. The laws of statistics show us that there is no effect on the next outcome in a series of events based on the outcome of the previous

Zhao and Mr. Fang have explained how horizontal and vertical representation returns can be calculated. The authors mentioned the methods step by step which makes it easier to understand the concept of how to implement the same. However as per the authors the horizontal and vertical representation bias cannot isolated clearly in a real world hence they try to build a new measurement for the representation returns.

It was clearly explained how to calculate the representation returns for both horizontal and vertical representation bias clearly explaining every part of the calculation including how to construct the comparison matrix. Finally the results of the vertical representation returns were put into the model of the prospect theory to select the portfolio.

This paper gives a complete view of the authors which may be different from the traditional aspects however it is well explained in a manner and need further study on the same. I believe there should be a mention on how to conduct the analysis on a much simpler way so that researchers who do not have access to such tools can study the effect of representation bias.

2. Acropolis Investment Management

Author: David