representativeness heuristic

Syllable breakdown

Dictionary meaning

a mental shortcut in which people assess the probability of an event or the membership of an object in a category based on how representative or similar it appears to be to a typical example or stereotype, leading to systematic errors in probability judgement; developed by Kahneman and Tversky, the representativeness heuristic explains the conjunction fallacy — judging the probability of A and B to be higher than the probability of A alone because A and B together seem more representative of the scenario — and base rate neglect — ignoring objective statistical base rates in favour of how well an individual case matches a stereotype; in financial markets representativeness causes investors to classify companies as good investments because they have a story that fits the template of successful businesses, ignoring base rate evidence about the proportion of similar companies that actually succeed; glamour stocks — large, well-known, fast-growing companies — receive premium valuations partly because they are representative of what investors think successful investments look like

Examples

• The representativeness heuristic caused investors to value dot-com companies with large customer bases as representative of future market leaders, ignoring the base rate failure rate of new technology companies.
• Kahneman and Tversky's Linda problem showed that people judge Linda to be more likely a feminist bank teller than simply a bank teller, violating the conjunction rule because the combined description is more representative.