1) Heuristics

Heuristics - Answering one question in place of another. Substituting one question for another.

IMPORTANT The substitute question is not deliberately chosen. Its a consequence of the mental shotgun of system 1.

2) Anchors

Anchoring happens subconsciously. Anchoring effects are powerful.

Causes of anchoring: 1) Priming effect 2) Insufficient adjustment

3) Availability Heuristic

- A salient event that attracts our attention will be easily retrieved

- A dramatic event temporarily increases the availability of its category.

Market crash in 2008 etc.

On occasions, judgments are made relatively effortlessly on the basis of knowledge that comes to mind most readily. The contents of our recollections constitute the input on which future decisions on courses of action are based.

In our decision-making process, our busy minds dont have time to examine all the evidence that is available but we use only the evidence that easily comes to our minds, easy to remember.

If It Is So Difficult to Recall, It Cannot Be Typical

After seeing many news stories of home foreclosures, people may judge that the likelihood of this event is greater. This may be true because it is easier to think of examples of this event

For example, in the most frequently cited study (Tversky & Kahneman, 1973, Experiment 8), subjects were read two lists of names, one presenting 19 famous men and 20 less famous women and the other presenting 19 famous women and 20 less famous men.

When asked, subjects reported that there were more men than women in the first list but more women than men in the second list, even though the opposite was true (by a difference of 1). Presumably, the famous names were easier to recall than the nonfamous ones, resulting in an overestimate. In fact, subjects were able to recall about 50% more of the famous than of the nonfamous names.

4) Availability and Emotions

How both of these heuristics impact your investment (trading) strategy and now that you are familiar with their influence and causes how will you improve your investment strategy?