Do Experts in Financial Magazines Exhibit the Representativeness Heuristic? Evidence from Taiwan

Abstract

This paper investigates the use of the representativeness heuristic and herding recommendation by experts in Taiwanese investment magazines. We reveal that high-performing experts exhibit less use of representativeness heuristics and more use of herding stock recommendations than poor performers do. Representativeness and herding recommendations increase when sentiments are pessimistic and during bull markets. In general, more representative stocks yield lower abnormal returns and higher return comovement. However, for high-performing experts, recommendations with some degree of representativeness have a higher abnormal return than do recommendations with no representativeness. In addition, stock return comovement caused by herding recommendations catches more market-level news than does stock return comovement that is caused by representativeness.

Do Investors Experience Heuristics in Earnings Forecasting?

“…Conversely, investors tend to ignore stocks when the price is below its intrinsic value. Investors who use the heuristic representativeness in making investment decisions believe that they can see patterns that are actually random processes (Laih, 2016).…”

“…Conversely, investors tend to ignore stocks when the price is below its intrinsic value. Investors who use the heuristic representativeness in making investment decisions believe that they can see patterns that are actually random processes (Laih, 2016). However, investors with heuristic representativeness can get more expected benefits from misevaluations (made by noise traders) than rational investors (Ying Luo, 2013).…”