Representativeness Heuristic
Judging probability by how closely something resembles a mental prototype, rather than by statistical likelihood.
How it is identified
Test: the judgement follows similarity to a stereotype and ignores how common that category actually is
Unit
qualitative
In depth
In markets this produces the assumption that a company resembling past great companies will become one, which ignores how many similar-looking companies did not. It also generates the belief that a good company is automatically a good investment, conflating the quality of the business with the attractiveness of the price. Its statistical form is base rate neglect: the prototype is vivid and the frequency is not, so the frequency is ignored. Asking how many companies fitting this description succeeded is the correction, and the answer is usually sobering.
Worked example
A young company is described as resembling an early stage of a famous compounder. Perhaps 3% of companies fitting that description delivered comparable outcomes, and the resemblance carries none of that information.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Representativeness Heuristic” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.