representitiveness & availability biases

can someone tell me the difference of the two? (ref. cfai v2. p93 - 95)

representativeness - you throw coint 3 times it all heads - you think the coin is faulty (or whatever you call it :frowning: ) availability - you think more people dying from murders then from smoking (TV)

availability is like recollection bias - past events that we an recall influene our decisions. I.e. a generation is scared of technology stocks now cuz of the bust in 2001 (for example - that’s not necessarily true). representiiveness deals with stereotypes when making decisions. I.e. that company has good management so we should buy its stock. not necessarily true, it can good management but be a lousy buy. OR that mutual fund invests only in socially responsible companies, so we shouldn’t buy it cuz its likely to underperform and have a small cap bias. (most likley true, but not necessarily in a small sample size).

Both heuristic

comp_sci_kid Wrote: ------------------------------------------------------- > representativeness - you throw coint 3 times it > all heads - you think the coin is faulty (or > whatever you call it :frowning: ) > availability - you think more people dying from > murders then from smoking (TV) does that mean availability is like frame dependence?

mmeridith, let me guess, you used schweser to figure out what frame dependency is, right? No it is heuristic, IMHO :slight_smile:

frame dependence is how you make decisions based on the medium the information arrives in. recalability is dependent on your past experience and ability to recall (remember) events.

didn’t read CFAI text, so yeah, Schweser’s all I know. (yuk) confused - so are heuristic and frame dependency the same? or has availability replaced one or both of them.

http://changingminds.org/explanations/theories/availability_heuristic.htm

strikershank Wrote: ------------------------------------------------------- > frame dependence is how you make decisions based > on the medium the information arrives in. That is schweser formulation and they give BS examples that i read stuff in WSJ and thought it is more credible then “My local newspaper” Some bs there > > recalability is dependent on your past experience > and ability to recall (remember) events.

comp_sci_kid Wrote: ------------------------------------------------------- > http://changingminds.org/explanations/theories/ava > ilability_heuristic.htm i’m convinced :slight_smile:

thanks guy. so, representiveness => mean-reversion availability biases => momentum trading am i right?

rand0m Wrote: ------------------------------------------------------- > thanks guy. > > so, > > representiveness => mean-reversion > availability biases => momentum trading > > am i right? representiveness => momentum trading gambler fallacy => mean reversion

gambler fallacy is an example of representitiveness. then what trading strategy would have some flavor of availability bias

gambler fallacy is not an example of representitiveness, it is an opposite

(cfai v2. p94) representativeness => sample number neglect => law of small numbers (gambler fallacy)

rand0m Wrote: ------------------------------------------------------- > (cfai v2. p94) > > representativeness => sample number neglect => law > of small numbers (gambler fallacy) uhh ohh… gambler fallacy is when you expect heads after coin was tossed 3 times and it was tails. representativness is when you expects tails because you thing the coint is faulty. Maybe i missing something?

CSK - gamblers fallacy is expecting the long term probabilities to hold in small sample sizes so you think that because you flipped heads three times in a row the next one HAS to be a tail becuase in the long run you expect 50% heads and 50% tails to show up. Well, we know that the law of large numbers will hold, but in a small sample size, gamblers fallacy will make you take unecessary risks.

two consequences of representativeness 1. base rate neglect => underestimate probability of an event with new information (analyst estimates discount news) 2. sample size neglect => law of small number ( gambler fallacy) (mean-reversion) availability biases: judge likelihood of an event based off an existing pattern in mind

i will have to read up on it rand0m i am not sure i follow