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The representativeness heuristic works by comparing an event to a prototype or stereotype that we already have in mind. For example, if we see a person who is dressed in eccentric clothes and reading a poetry book, we might be more likely to think that they are a poet than an accountant.
Loss aversion was also used to support the status quo bias in 1988, [9] and the equity premium puzzle in 1995. [10] In the 2000s, behavioural finance was an area with frequent application of this theory, [11] [12] including on asset prices and individual stock returns. [13] [14]
The striatum processes the errors in prediction and the behavior changes accordingly. After a win, the positive behavior is reinforced and after a loss, the behavior is conditioned to be avoided. In individuals exhibiting the gambler's fallacy, this choice-outcome contingency method is impaired, and they continue to make risks after a series of ...
Behavioral Finance attempts to explain the reasoning patterns of investors and measures the influential power of these patterns on the investor's decision making. The central issue in behavioral finance is explaining why market participants make irrational systematic errors contrary to assumption of rational market participants. [1]
The tendency to overestimate the amount that other people notice one's appearance or behavior. Stereotype bias or stereotypical bias Memory distorted towards stereotypes (e.g., racial or gender). Suffix effect: Diminishment of the recency effect because a sound item is appended to the list that the subject is not required to recall.
On the other hand, economists, behavioral psychologists and mutual fund managers are drawn from the human population and are therefore subject to the biases that behavioralists showcase. By contrast, the price signals in markets are far less subject to individual biases highlighted by the Behavioral Finance programme.
The Cognitive Bias Codex. A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. [1] Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the objective input, may dictate their behavior in the world.
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. [1] [2]