Economics Cognitive Biases Questions
The clustering illusion refers to the tendency of individuals to perceive patterns or clusters in random or unrelated events. In economic decision-making, this bias can lead individuals to believe that there is a pattern or trend in data where none actually exists. This can result in faulty decision-making based on false assumptions or beliefs about the market or economic conditions. For example, an investor may believe that a stock is more likely to continue its upward trend simply because it has been rising for a few consecutive days, even though each day's movement is independent of the previous day's. This bias can lead to irrational investment decisions and potentially negative financial outcomes.