Heuristic‐Driven Bias: The First Theme

Hersh Shefrin

in Beyond Greed and Fear

Published in print October 2002 | ISBN: 9780195161212
Published online November 2003 | e-ISBN: 9780199832996 | DOI:

Series: Financial Management Association Survey and Synthesis Series

 Heuristic‐Driven Bias: The First Theme

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Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic‐driven bias. The chapter describes these biases using behavioral concepts such as availability, representativeness, anchoring‐and‐adjustment, overconfidence, and aversion to ambiguity. Examples are provided to illustrate how these concepts affect the manner in which investors form predictions.

Keywords: anchoring and adjustment; aversion to ambiguity; availability; conservatism; heuristic; heuristic‐driven bias; overconfidence; regression to the mean; representativeness

Chapter.  3637 words. 

Subjects: Financial Markets

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