Estimated Errors In The Market

Another fairly common phenomenon in the market is representativeness. This phenomenon occurs if traders do not want to overload themselves with excess information, but they need to make a decision based on the information received. It is thanks to this that a representative heuristics has emerged.

Market players have to choose between simple and correct information to shape their approach to trade. Due to said kind of heuristics, the amount of information needing to be processed is significantly reduced.

Also, thanks to representative heuristics, market participants begin to draw conclusions on the basis of similarity of situations, relying on other information. However, according to theories it is quite complex in theory, in practice it helps to make decisions in any areas where people work.

Also, representativeness is used to estimate the probability of occurrence of certain situations from a certain action. And thanks to it you can understand the exchange rates. In short, representative heuristics has an extremely wide field of activity.

Types Of Mistakes

Despite her undeniable positive qualities, she can also push for stupid mistakes. All this is due to the factor that other details are not taken into account by it. It should also be remembered that representative heuristics is solely based on publicly known phenomena.

All of the above reveals the following problem, the «base estimate error». The essence of it is that statistics on the impending event are ignored for the sake of data more impressive but less important and significant.

These least useful data are beginning to attract attention by the presence of representativeness. Also, these errors show themselves when information is supplied very bright, memorable. Traders are beginning to use information in their work that they believe may characterize alternatives.

Another, no less frequent phenomenon in the market, is the «coincidence error». It shows itself when people view future events as more or less likely.

To understand how this manifests itself, it is necessary to calculate which of the events will be more likely. The combined probability of these phenomena should not be higher than the percentage of their probabilities individually.

Research proves that people willingly trust representativeness, even if it leads to gross mistakes. Entirely under the rule of psychological factors, they will prefer to pay attention to minor facts, confusing them with important ones.

This leads to another known problem – «gambling errors». Simply put, when a trader bets and in no way can stop in time. Even if the market player sees that he is wrong, he still continues to open positions, hoping to win back.

The opinions of market players grow like a snowball, forming a general opinion of the market and opinions of each trader ‘s work with it in particular.