Reducing Uncertainty Representative Bias and Decision-making of Micro Subjects

Abstract

The increasing number of predictions made in financial market indicated the error caused by representativeness. Representativeness heuristic is a popular study on subjective probability of an event. Researches have been made regarding the impact of representativeness heuristic on decision making. Previous studies have investigated the cause of representativeness from a psychological perspective. It has also been applied to financial cases. The study of representativeness provides an empirical guideline to investors in terms of making a prediction. This study uses case study to give a comprehensive overview on the impact of representativeness on two components of the market. This paper conducts further discussions regarding this heuristic in three aspects which are stock market, gambling and investment decisions. Representativeness bias is a very important theory in behavioral economics. Studying its influence mechanism can not only bring marginal expansion to the existing research, but also provide important reference for the behavior of investors. This paper is divided into five main parts, section one introduces representativeness heuristic and mention the connection between representativeness and economic field. Section two looks at previous studies on this heuristic, following by detailed analyses on three applications in the field of economy in section three. The method of case study is used in section three. Section four and five gives a conclusion of the content this paper and display of references respectively. The main finding of this paper is the influence of representativeness on predictions and decisions made by individuals and the superiority of firm in avoiding the negativity of representativeness. The findings illustrate the main difference between individuals and firms, giving a reference to individual investors to make a less affected decision.