representativeness bias

CFA Level III
#1

Hi Guys - how is it that viewing a “good company” as a “good stock” is an example of representativeness?

Source: Kaplan 2013, Book 1 p. 407.

thanks

#2

yazena, it’s my understanding that the Representativeness Bias is taking a piece of irrelevant yet current information and making general assumptions about an investment. For example, watching TV you see someone drinking a Pepsi on a sit-com you like, and you think “this is a popular show, tons of people watch this and they’re adverstising pepsi on it essentially…oh i should buy Pepsi stock.”

Although Kaplan’s example, in my opinion, is pretty poor and vague at best, i can see where they infer that someone who sees a company as “good” suffers from that bias if they think being a good company means it’s a good investment.

#3

I have fun determining between representative and availability biases.

#4

JuniorCk8, makes sense. Thank you : )

#5

Good question. Thinking about it…one of the forms of representativeness is sample size neglect. Maybe…the population is the entire set of information available about the proposed investment. There can be a subset of that info that leads the person to thinking it’s a “good company.” The person then applies that conclusion about the company (based on that certain subset/sample) to the stock as an investment (whereas all of the information available about the stock may indicate that it is not a good investment). Feel free to critique or add anything. Just kinda thinking out loud here…

#6

one way to think about representation bias is: “if that, then that” …e.g. stereotyping things.

So what you wrote on top could be correct in that sense… “if company is good, then stock is a good investment” - which might of course not be true depending on current valuations etc

#7

viewing a “good company” as a “good stock” is called a Halo effect and it says that it’s a kind of representativenes bias, although quite distinct :slight_smile: