What is representativeness heuristic?
A representativeness heuristic is a bias in which an individual categorises a situation based on a pattern of previous experiences or beliefs about the scenario.
Umm, if that was a bit heavy, visualise this:
You see a person on the road. He is wearing a starched extra-white shirt (shirt not tucked in). He has an expensive cellfone is his hand. There is a very visible thick gold chain in his neck and an equally thick gold bracelet in his wrist. He is also wearing numerous bejeweled gold rings in his fingers and has a big tika on his forehead. Got the picture in mind? Well, if you suck at visualising stuff, its someone like this:
Now I ask you; What do you think does a person like this do?
a) Software Engineer
b) A local neta of a political party
Chances are, you will choose option b. (Btw, the person in the photo is actually an MLA from Pune)
Now is it a rule that a software engineer cannot dress like this? No! Still, we associate someone like this with a politician, based on our past observations and experience. This is representativeness heuristic. But, its not necessary that our conclusion, based on past observations, may be correct everytime..
Representative heuristic and the market
One can see this phenomenon happening in the market a lot of times. Some examples:
- Tata Steel declares phenomenal quarterly results and on that day, all steel stocks prices hit the roof. (just an example, but it happens in a lot of sectors)
- IIP numbers show consumer durables sector doing well and all consumer durable stocks go up on that day. (has happened recently)
- Rubber prices come down for a brief period and all tyre stocks go up.
|Data sourced from Edelweiss Website. In some cases, the|
calculation seems inaccurate. Anyways, I am not interested
in strict numbers, but in what they represent.
- It could very well be the case that what the market thinks is right and the MNC parents of these delisting candidates will be as generous as Atlas Copco. However, it is not necessary! Just because Atlas Copco was generous does not mean everybody will be equally generous.
- One should adopt a logical approach towards analysing delisting cases and not be swayed or affected by biases. Dont take things for granted! More on playing delisting cases here.