If you are faced with a question and you don’t know the answer, using the representativeness heuristic is a way of coming up with a plausible solution.
The representative heuristic is when our brains quickly assess the probability of several possible options and plump for the most probable.
For example, if you get stuck in traffic near a sports stadium on a Saturday, your guess that there is a match on and you should have checked before you set off is likely to be right.
The representativeness heuristic
The snappily named representativeness heuristic is one of a group of heuristics – mental shortcuts – put forward by the psychologists Amos Tversky and Daniel Kahneman in the 1970s.
Not having all the information to conclusively answer a question, the brain searches for reference points to come up with an answer.
Sometimes intuitive judgment, or relying on stereotypes, is likely to be right. The person just caught speeding in the souped-up sports car with the big exhausts is more likely to be a young male driver than an old woman.
This conclusion can reasonably be drawn from the fact that there are many more young male drivers of modified sports cars than elderly female ones. But context can easily be forgotten.
Kahneman gives an example of a woman reading the New York Times on the New York subway and asks whether it is more likely that she has a PhD or does not have a college degree.
“Representativeness would tell you to bet on the PhD but this is not necessarily wise,” he says. “You should seriously consider the second alternative, because many more non-graduates than PhDs ride in New York subways.”
He warns of excessive willingness to predict the outcome of events. “To be useful, your beliefs should be constrained by the logic of probability.”
Not remembering to put your assumptions into context can lead people to draw conclusions that are not backed up by statistics and are about as reliable as visiting the woman with the crystal ball on the pier.
There are many recognised examples of where your intuition or the representativeness heuristic can seriously let you down and sometimes cost you money.
The gambler’s fallacy is the idea that past events will influence future ones even though the results are independent of each other.
The gambler believes that a run of red numbers at the roulette wheel must mean that black is due to come up next. Or a run of heads must mean that the next toss of the coin will result in tails.
But the odds are still 50/50 that the coin will come down heads again and the roulette wheel does not remember the colour the ball landed on last.
Hot hand fallacy
Believing that the winning run will continue, the opposite of gambler’s fallacy, is known as the hot outcome.
A variation of the representativeness heuristic is a belief that a run of success will lead to more success – the hot hand of the high-scoring basketball player, for example.
This is possibly easier to believe in than the gambler’s fallacy because sportsmen do have winning streaks. Chelsea football club, for example, won 13 league games in a row between October 2016 and January 2017. And good results should do wonders for players’ confidence.
But Tversky, Gilovich and Vallone, in their study of basketball players, concluded that having “hot hands” did not predict future success.
Hot hand fallacy’s opposite is known as the stock of luck. All good things must come to an end, including your stock of luck.
Gambler’s fallacy and hot hand fallacy can co-exist. A player can decide they have done so well at “predicting” random outcomes in the past that they believe they are on a winning streak and are certain to predict the next result correctly.
So why do people continue to follow these patterns of behaviour? Surely the ‘fallacy’ part of the name should be adequate warning.
Australian psychologist Professor Michael Smithson has a suggestion. He says: “We didn’t evolve in casinos; we evolved in environments full of anti-persistent (like prey-populations) and persistent (like the weather) processes. We expect the world around us to have ‘memory’, and for good reason: It usually does.”
Humans are hard-wired to fall for the various biases that come under the umbrella of the representativeness heuristic. Traders risk losing badly if they fail to recognise their own flaws. Heuristics are rarely backed up by statistics.