CFA CFA Level 3 Behavioral Finance: Difference between Representative Bias and HindSight bias

Behavioral Finance: Difference between Representative Bias and HindSight bias

  • This topic has 6 replies, 4 voices, and was last updated Oct-17 by RaviVooda.
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    • RaviVooda
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      Please help me understand Representative bias and also the difference between Representative Bias and HindSight bias
      I am getting very confused in these 2 biases.


      @Alta12
      ,@vincentt,@sophie,@jwa,@marc

    • vincentt
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      Representative bias – overly simplified decision rules without doing further thorough analysis. For example, a quarter year earnings fell, you assume it’s not doing well without analysing further.

      Hindsight bias – it’s something like self attribution in a way you would only remember your right decision but not your bad ones.

    • AjFinance
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      @RaviVooda

      Representative Bias is when we arrive at a conclusion based on the facts that suggest (represent) it without delving deeper into it. For ex : You invested in a company because you feel its a good company with an ethical outlook. However, the fact that the company’s image is good does not represent the fundamental soundness of the firm.

      Hindsight Bias is when we falsely overestimate the positive influence of our past decisions on the investment return. We might have made a few wrong estimates, but those factors didn’t affect the investment returns. In Hindsight, though, we believe that we made all the right moves.

    • Jwa
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      @RaviVooda I also find representativeness a bit confusing. Some good comments above, and I think it’s also worth remembering that (from my understanding) representativeness is about classifying new information with simple heuristics, while hindsight bias is to do with faulty processing of past results/information.

    • RaviVooda
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      @Jwa very true. I still find them confusing. As far as I understood, representative bias is giving too much emphasis on current information and ignoring past data. And also we classify information based on our past experiences.

      How would you differenciate Hindsight and availabilty bias? Both of them are actually interpreted based on past data. While hindsight I understand it as we classify current decisions based on our past experience be it good or bad. And availability bias as how fast it comes to memory.

      Both of them appear same to me.


      @AjFinance
      ‌ ,@vincentt,@alta12 ,@jwa

    • vincentt
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      Hindsight Bias – this is a cognitive bias belief perseverance whereas Availability bias is a cognitive bias based on information processing.

      In availability bias, you decide based on whatever that comes to mind first or whatever you manage to first obtain. I would say this is somehow similar to framing bias in a way or too (sorry didn’t mean to confuse you further lol).

      Basically, you based your data on a narrowed range of reference.

      As for hindsight bias it’s to do with how you believe that your initial decision was ‘correct’, even though they were not.

    • RaviVooda
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      @vincentt‌ thank you

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