Representativeness Bias

Representativeness bias is exhibited when investors attach too great a weight to particular data points. For example, investors may assume that current trends in an industry that is inherently cyclical will remain in place indefinitely just because they have been in place in recent years or investors may assume that the results of a study involving a small sample will be representative of a much larger population.

Potential solution: To avoid falling victim to representativeness bias, investors should try to be mindful of probabilities and historical norms before extrapolating current assumed trends far out into the future.

It is important to note that not all investors will be susceptible to exactly the same biases. We are all perfect (and imperfect) in our own special way! You are the best judge to identify which biases have the better of you. Recognize these biases when you are exhibiting them and deliberately make an attempt so they do not cloud your investment judgment.

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