This chapter described the first th

This chapter described the first theme of behavioral finance, heuristic-driven bias, and introduced some of the main heuristics upon which financial practitioners rely. Throughout the book, readers will encounter many instances of representativeness, anchoring-and-adjustment, overconfidence, availability bias, and aversion to ambiguity. These heuristics surface in many different contexts, such as analysts’ earnings forecasts, investors’ evaluation of mutual fund performance, corporate takeover decisions, and the types of portfolios selected by both individual and institutional investors. Because of their reliance on heuristics, practitioners hold biased beliefs that render them vulnerable to committing errors. In addition to the heuristics described in this chapter, readers will come across a host of others, such as excessive optimism, the illusion of validity, hindsight bias, the illusion of control, and self-attribution error. There are many examples of such errors in this book.