Behavioural traps - Representativeness bias

In many of the decisions we make each day, we need to estimate how likely certain events are to happen. Before leaving the house, for example, we might ask ourselves whether it's likely to rain - and whether we should take an umbrella. In finance, this type of reasoning is almost always required. We might try to assess whether the price of a financial asset is more likely to rise or fall, or - when taking out a mortgage - what direction interest rates might take in the coming years.

However, our brains are not naturally wired to think in statistical terms. Instead, we often rely on mental shortcuts known as heuristics. One of the best-known is called the representativeness bias, where we tend to make decisions based on analogies or stereotypes.