If investors overweight recent performance in forecasting the future, they are exhibiting representativeness bias.
What is the meaning of representative bias?
When determining the likelihood of an event or object, we utilize a form of mental shortcut known as the representativeness heuristic, sometimes referred to as the representativeness bias. To put it another way, we make assumptions about something or someone based on how representative a certain instance is.
Why is representative bias a problem?
Because we frequently rely on representativeness, we frequently neglect to take other types of information into consideration, which can lead to errors. The conjunction fallacy and the gambler's fallacy are only two examples of the many cognitive biases that researchers have linked to this heuristic due to its widespread use.
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