I’m having difficulty understanding the meaning of “conservatism” and “representativeness” especially in the context that: “Representativeness leads to an underweighting of base rates” and how “conservatism leads to and overestimation of base rates” I do not understand what this means.
The conservatism part means that one isn’t adjusting nominal values enough given new information. Though I don’t really remember reading it (I’m making notes of that section right now), I assume representativeness is the opposite.
Reading 13 from the CFAI has been so far the most verbose, poorly written and confusing one for me so far. I am going to wait until I get the Schweser Audio CD and see if they clarify this any better. Sorry I can’t help much right now, I am just as confused as you are.
If I remember correctly, representativeness is about reliance on stereotypes and base rates are statistically calculated probability. So you underweight probability relying on something similar to the current situation, like your past experience on similar investment vehicle.