Can Representation Bias Help the Returns Forecast and Portfolio Selection?

Representation Bias, Return Forecast, and Portfolio Selection in the Stock Market of China

“…By (11), we can see that the forecast error of the representation returns is influenced by the forecast errors of both horizontal and vertical representation returns. And it is also affected by the horizontal representation bias preference parameter .…”

“…The vertical representation bias signifies another behavior or other habits that people tend to easily judge or forecast a thing according to its own history records (see [5]). Xu et al put forward a method to calculate the vertical and horizontal representation returns; then Zhao and Fang propose a new one (see [10,11]). Here we follow their explanations to the representation returns, but we extend the computation in detail.…”

“…Xu et al [10] extend Tversky's model based on investors' representation bias and under the frame of maximizing the utility; then they examine it with the vertical representation bias as an example. Zhao and Fang [11] propose a computation method of both the vertical and horizontal representation bias returns and try to find if the representation information can help return forecast in financial market.…”

“…However, the optimal investment weights are not shown. According to [11], the adapted fuzzy analytic hierarchy process method is firstly used to measure horizontal representation bias. The work is based on the consideration that, in the complex financial market, the vivid path of how the representation bias affects the investor's decisions is unknown yet.…”