Judgment under Uncertainty: Heuristics and Biases
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What they found
The paper that launched the heuristics-and-biases research program. Tversky and Kahneman describe three mental shortcuts people use to judge probabilities: representativeness (judging by resemblance to a stereotype, which ignores base rates and sample size), availability (judging by how easily examples come to mind), and anchoring (starting from an initial value and adjusting insufficiently). Each produces predictable, systematic errors, illustrated with simple experiments. The paper is short, readable, and has been cited tens of thousands of times.
What you can use
- Seeing a 'pattern' in a short run of prices is the representativeness heuristic at work; small samples look more meaningful than they are.
- Recent, vivid events (a crash, a huge win) feel more likely than they are because they are easy to recall.
- Your entry price is an anchor; decisions about a position should not depend on it, but they usually do.
Caveats
Psychology experiments on students, not market data. Later research has debated how well these lab biases carry over to experienced professionals under incentives.
Tags: behavioral, heuristics, psychology, foundations
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.