Reducing Uncertainty Representative Bias and Decision-making of Micro Subjects

Yuhan Xia

doi:10.54097/hbem.v11i.8095

Authors

Yuhan Xia

DOI:

https://doi.org/10.54097/hbem.v11i.8095

Keywords:

Representativeness, Stock Market, Gambling, Investment.

Abstract

The increasing number of predictions made in financial market indicated the error caused by representativeness. Representativeness heuristic is a popular study on subjective probability of an event. Researches have been made regarding the impact of representativeness heuristic on decision making. Previous studies have investigated the cause of representativeness from a psychological perspective. It has also been applied to financial cases. The study of representativeness provides an empirical guideline to investors in terms of making a prediction. This study uses case study to give a comprehensive overview on the impact of representativeness on two components of the market. This paper conducts further discussions regarding this heuristic in three aspects which are stock market, gambling and investment decisions. Representativeness bias is a very important theory in behavioral economics. Studying its influence mechanism can not only bring marginal expansion to the existing research, but also provide important reference for the behavior of investors. This paper is divided into five main parts, section one introduces representativeness heuristic and mention the connection between representativeness and economic field. Section two looks at previous studies on this heuristic, following by detailed analyses on three applications in the field of economy in section three. The method of case study is used in section three. Section four and five gives a conclusion of the content this paper and display of references respectively. The main finding of this paper is the influence of representativeness on predictions and decisions made by individuals and the superiority of firm in avoiding the negativity of representativeness. The findings illustrate the main difference between individuals and firms, giving a reference to individual investors to make a less affected decision.

Downloads

Download data is not yet available.

References

Kahneman, D., & Tversky, A. (1972). Subjective probability: A judgment of representativeness. Cognitive psychology, 3 (3), 430 - 454.

Bílek, J., Nedoma, J., & Jirásek, M. (2018). Representativeness heuristics: A literature review of its impacts on the quality of decision-making. Scientific papers of the University of Pardubice. Series D, Faculty of Economics and Administration. 43/2018.

Alberoni, F. (1962). Contribution to the study of subjective probability. I. The Journal of General Psychology, 66 (2), 241 - 264.

Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The journal of Finance, 55 (2), 773 - 806.

Odean, T. (1998). Are investors reluctant to realize their losses? The Journal of finance, 53 (5), 1775 - 1798.

Yates, J. F., Zhu, Y., Ronis, D. L., Wang, D. F., Shinotsuka, H., & Toda, M. (1989). Probability judgment accuracy: China, Japan, and the United States. Organizational behavior and human decision processes, 43 (2), 145 - 171.

Yates, J. F., Lee, J. W., & Bush, J. G. (1997). General knowledge overconfidence: cross-national variations, response style, and “reality”. Organizational behavior and human decision processes, 70 (2), 87 - 94.

Chen, G., Kim, K. A., Nofsinger, J. R., & Rui, O. M. (2007). Trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors. Journal of behavioral decision making, 20 (4), 425 - 451.

Ramsey, C. A., & Hewitt, A. D. (2005). A methodology for assessing sample representativeness. Environmental Forensics, 6 (1), 71 - 75.

Irshad, S., Badshah, W., & Hakam, U. (2016). Effect of representativeness bias on investment decision making. Management and Administrative Sciences Review, 5 (1), 26 - 30.

Boussaidi, R. (2013). Representativeness heuristic, investor sentiment and overreaction to accounting earnings: The case of the Tunisian stock market. Procedia-Social and Behavioral Sciences, 81, 9 - 21.

Guryan, J., & Kearney, M. S. (2008). Gambling at lucky stores: Empirical evidence from state lottery sales. American Economic Review, 98 (1), 458 - 73.

Chóliz, M. (2010). Cognitive biases and decision making in gambling. Psychological reports, 107 (1), 15 - 24.

Fischer, S., & Merton, R. C. (1984, January). Macroeconomics and finance: The role of the stock market. In Carnegie-Rochester conference series on public policy (Vol. 21, pp. 57-108). North-Holland.

Javed, H., Bagh, T., & Razzaq, S. (2017). Herding effects, over confidence, availability bias and representativeness as behavioral determinants of perceived investment performance: empirical evidence from Pakistan stock exchange (PSX). Journal of Global Economics, 6 (1), 1 - 13.

De Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact? The Journal of finance, 40 (3), 793 - 805.

Tversky, A., & Kahneman, D. (1971). Belief in the law of small numbers. Psychological bulletin, 76 (2), 105.

Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and the near-term stock market. Journal of empirical finance, 11 (1), 1 - 27.

Haritsa, J. R., Carey, M. J., & Livny, M. (1992). Data access scheduling in firm real-time database systems. Real-Time Systems, 4 (3), 203 - 241.

Christensen-Szalanski, J. J., & Beach, L. R. (1982). Experience and the base-rate fallacy. Organizational Behavior and Human Performance, 29 (2), 270 - 278.

Bar-Hillel, M. (1980). The base-rate fallacy in probability judgments. Acta Psychologica, 44 (3), 211 - 233.

Bar-Hillel, M., & Fischhoff, B. (1981). When do base rates affect predictions?.

Kahneman, D., & Tversky, A. (1977). Intuitive prediction: Biases and corrective procedures. Decisions and Designs Inc Mclean Va.

Griffiths, M., & Wood, R. (2001). The psychology of lottery gambling. International gambling studies, 1 (1), 27 - 45.

Reid, S., Woodford, S.J., Roberts, R., Golding, J.F. and Towell, A.D., 1999. ‘Health-related correlates of gambling on the British National Lottery’, Psychological Reports, 84, pp.247 - 254.

Griffiths, M. D., 1999. ‘The psychology of the near miss (revisited): A comment on Delfabbro and Winefield’, British Journal of Psychology, 90, pp.441 - 445.

Anderson, R. (2003). 12. Capital structure, firm liquidity and growth. Firms' Investment and Finance Decisions: Theory and Empirical Methodology, 2, 270.