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## Heuristics in Trading Pt. 2

Representativeness

Representativeness: Used when making judgments about the probability of an event under uncertainty.
Representativeness at its core is overshooting the accuracy of a prediction because of the situations similarity to something else that you would expect to happen. This process usually includes disregarding any statistical evidence of its likelihood. It is the natural stereotyping of people and situations that our brain does in order to keep information tidy and coherent.Let’s examine an example of the representative heuristic.

Tony is an above average size male, twenty six years old. He is good at working with his hands, and enjoys the outdoors. Tony would be described by many as a “man’s man”.
When guessing what he does for work, would you say it is more likely that he works as a Motorcycle Mechanic or as a Retail Salesperson?
The intuitive answer to this question would be that Tony is a motorcycle mechanic. The image in our mind of a strong young man fixing motorcycles, most likely an avid rider himself, fits much better than imagining him standing in the showroom of a clothing store.The problem with jumping to the conclusion is the disregard of statistical data. As of 2012, it is reported that there are 16,800 Motorcycle Mechanics in the United States. The same report says that there are 4,447,000 Retail Salespeople in the United States. The likelihood that Tony is in Retail Sales is substantially larger. As stated above, our minds tend to disregard statistical evidence in order to form a coherent story. In Tony’s case there was no real information in his description that would lend to his working in one field or another. In cases like these the best course of action is to simply look at the highest probability, ignoring your intuition, and go with that answer. Over a large enough sample size you will be correct far more often than not.How Representativeness plays a role in Trading