Judging by Resemblance
When we assess the probability that something belongs to a category, we often judge it by how much it resembles our mental prototype of that category — rather than by statistical base rates. This is the representativeness heuristic, another of the foundational heuristics identified by Tversky and Kahneman in their 1974 Science paper.
The heuristic is efficient: if something looks like a duck and acts like a duck, it probably is a duck. But it produces systematic errors when the resemblance to a prototype is misleading, or when it overrides more statistically relevant information about how common each category actually is.
The Linda Problem and the Conjunction Fallacy
Tversky and Kahneman's most famous demonstration of representativeness is the "Linda problem" (1983). Participants are told: "Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations."
Participants are then asked which is more probable: (A) Linda is a bank teller, or (B) Linda is a bank teller who is active in the feminist movement. The majority choose B. But this is logically impossible: two conditions are always less probable together than either is alone. The description of Linda resembles the prototype of an activist more than a bank teller, so the conjunction feels more probable — despite being mathematically impossible.
In investing, this fallacy appears when investors judge a company's stock to be a good investment because the company itself is excellent. A great company can be a poor investment if the price already reflects (and exceeds) its quality. Representativeness confuses the quality of the underlying business with the quality of the investment.
Base Rate Neglect
The representativeness heuristic causes people to ignore base rates — the underlying statistical frequencies of outcomes. A startup may look exactly like other successful tech companies: young founder, disruptive product, rapid early growth. But the base rate for startup success is very low. Representativeness draws attention to the resemblance; base rate neglect means the low prior probability is discounted.
Kahneman and Tversky documented base rate neglect across dozens of experiments. In one study, participants given a personality description of a fictional person accurately describing an engineer showed a clear bias toward guessing "engineer" regardless of whether they were told the sample was 70% lawyers or 70% engineers. The description dominated the statistical prior.
The Hot Hand Fallacy
Representativeness also contributes to the hot hand fallacy — the belief that a person or investment on a winning streak is more likely to continue winning. Each win increases the resemblance to the prototype of a "hot" performer, and representativeness causes observers to extrapolate the streak.
Psychologists Thomas Gilovich, Robert Vallone, and Amos Tversky analysed basketball shooting data in a 1985 paper and found no statistical evidence for the hot hand in basketball. The streaks people perceive are consistent with random sequences. The same principle applies to fund managers: a five-year run of outperformance resembles skill, but base rates suggest much of it is luck. Representativeness makes it feel like the former.