in 2007 AM question 3, i pointed out representativeness (when the analyst believes that last year’s US Equities underperformance will continue this year) however the answer says status quo. isnt representativeness correct from the point of view that ‘past winners will be future winner and past losers be future losers’?
I remember from watching a Schweser video that representativeness has to do more with remembering a recent big decline . Status quo is more of a “pain will continue” thing, not rooted in a particular event. It is very hard for me to distinguish between these traps too
last year - status quo several years ago - representativeness my shortcut
Status quo means an extreme reluctantness to depart from earlier plans. Representativeness is a general shortcut for predicting the future based on a small sample of data. So they assume last year’s high returns are “representative” of future returns. Wiki here: http://en.wikipedia.org/wiki/Representativeness_heuristic
There is a diff between status quo bias and status quo trap. The former is usually like do nothing in asset allocation, while the latter is using the current status as a forecasting. Repsentativeness is based on some rule of thumbs, which is more than do nothing. That’s my understanding…please correct me if i’m wrong.
representativeness-----bad historical performance, analyst predict those stocks will continue to underperform. status quo–allocation to 401k, people choose one allocation and then dont do anything about…thus maintaining the status.
status quo bias is discussed very briefly in vol 2 reading 11, page 54 with the example of how long time members of a retirement plan have often never changed asset allocations and therefore have very different asset allocations from new participants of the same age and similar objectives/assets.