The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
Understanding the representativeness heuristic
They noted that the representativeness heuristic explains the degree to which an event is:
Similar in essential characteristics to the parent population (class), and
Reflective of the important features of the process by which it is generated.
To better explain the heuristic, consider the example of John.
John is a history buff who enjoys visiting museums and other places of cultural significance. He is also a regional chess champion and goes fossicking for gold on the weekend.
Given the information supplied, which is the more likely scenario?
John is an archaeologist in residence for a prestigious university.
John is a truck driver.
When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
However, the odds that John is a truck driver are far greater because truck drivers make up a higher percentage of the population than archaeologists.
When decisions are made based on the representativeness heuristic, the individual is more likely to overestimate the likelihood of an event occurring. For a given event, there is no correlation between representativeness and a higher probability of that event occurring.
The representativeness heuristic in business and marketing
The representativeness heuristic is common in consumer behavior because products are rarely described completely. As a result, the consumer must form inferences about the information that is missing.
In a 2004 study, researchers found that consumers inferred a higher product quality from a no-name brand if the packaging was designed to mimic a better known global brand.
Representativeness is also seen in finance where investors prefer to buy a stock with unusually high share price appreciation.
Further studies demonstrated that investors misattributed positive company characteristics (such as high-quality products) as an indicator of a good investment.
Applications in marketing
Marketing agencies use the heuristic to convince consumers that products are representative of ideas or concepts they already possess.
Advertisements depicting suave men drinking alcoholic beverages surrounded by women lead consumers into thinking that they must also drink that brand to be popular with the opposite sex.
Marketing campaigns for SUVs and trucks also suggest that their rugged off-road vehicles are only driven by similarly rugged men.
In each case, the consumer makes a buying decision based on comparing their current situation to a representative example.
Key takeaways
The representativeness heuristic occurs when individuals estimate the likelihood of an event based on a broad and typical example of an event or object.
The representativeness heuristic causes the individual to overestimate the chances of an event occurring. This is caused by incorrectly correlating representativeness with higher probability.
The representativeness heuristic is prevalent in marketing campaigns where product qualities, concepts, or themes are matched with those the consumer believes they already possess.
A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the businessmodel. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
