Seen conflicting definitions from Kaplan and Wiley
how do you define/differentiate between the two?
Someone feel free to correct me if I’m wrong.
The way I understand it is that Availability refers to your ability to recall easy/recent events that end up influencing your decision, whereas Representativeness is when you initially categorize something and later on, base recent information in the context of your original categorization (e.g you originally categorized a stock as growth stock, and despite recent information that this stock might not be a considered a growth stock anymore, you still give a high probability to the fact that this is a growth stock and thus make you decision based on this categorization)
Availability are decisions based on past events or information that are “literally” in memory. - Blogs/Ads/Friend’s Recommendations - all things you have been subjected to that create a memorable event to reference and then results in a decision, because the information in front of you is available and easy to refer to. Representativeness is more based on if/then. If this happened before then this (similiar situation) should result in the same outcome. This scenario represents that scenario…and weighing the decision heavily on that thinking…
I always recommend using the Cfa vocabulary, max points on essay this way. Go back and read it there. Representative bias is base rate neglect and sample size neglect, classifying new info based on past experiences. Availability is using most easily recalled info. Good luck.
Highly recommend reading this book: The Undoing Project by Michael Lewis. It talks about the various behavior stuff in various professions including finance. Many of the behavior finance terms can be attribute to the original authors Tversky (former professor in Stanford) and Kahneman (professor in Princeton).
I agree with bazz above.
I came across a Word file I had written back in 2013; maybe this will help:
Availability
People tend to attach more importance or significance to information that is more available, and less importance or significance to information that is less available. Thus, they’ll tend to exaggerate the likelihood or significance of well-publicized events, which may be quite unlikely and insignificant.
Representativeness
People tend to believe that recent data give a better clue to the future than average data do. Thus, they’ll tend to believe that recent winners (losers) will continue to win (lose), instead of reverting to the mean. In a way, representativeness is the opposite of anchoring because representativeness is based on the most current information, rather than on older information. Similarly, representativeness (which bases analysis on current information) differs from status quo bias, which does not seek new information.
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I bought a fixed income mutual fund a year ago and sell it yesterday. I bought the fund because it was advertised everywhere ( availability ) and I sold it because the central bank is about to begin hawkish (representativeness).
Availability: he/she has always been investing in stock X, because stock X resonates well with him/her and because he/she can quickly retrieve it --> something is readily available.
Representativeness: you underweight the base case scenario and overweight new information that is different from the base case. This leads to base case neglect and sample case neglect (placing too much emphasis on too small a number --> you disregard the population and only look at a small sample)
Mark it