316 N.Barberis et al./Journal of Financial Economics 49 (1998)307-343 degree to which it is(i)similar in its essential properties to the parent popula- tion,(ii)reflects the salient features of the process by which it is generated" (p.33).For example,if a detailed description of an individual's personality matches up well with the subject's experiences with people of a particular profession,the subject tends to significantly overestimate the actual probability that the given individual belongs to that profession.In overweighting the representative description,the subject underweights the statistical base rate evidence of the small fraction of the population belonging to that profession. An important manifestation of the representativeness heuristic,discussed in detail by Tversky and Kahneman,is that people think they see patterns in truly random sequences.This aspect of the representativeness heuristic is suggestive of the overreaction evidence described above.When a company has a consistent history of earnings growth over several years,accompanied as it may be by salient and enthusiastic descriptions of its products and management,investors might conclude that the past history is representative of an underlying earnings growth potential.While a consistent pattern of high growth may be nothing more than a random draw for a few lucky firms,investors see 'order among chaos'and infer from the in-sample growth path that the firm belongs to a small and distinct population of firms whose earnings just keep growing.As a conse- quence,investors using the representativeness heuristic might disregard the reality that a history of high earnings growth is unlikely to repeat itself;they will overvalue the company,and be disappointed in the future when the forecasted earnings growth fails to materialize.This,of course,is what overreaction is all about. In a recent study,Griffin and Tversky (1992)attempt to reconcile conserva- tism with representativeness.In their framework,people update their beliefs based on the'strength'and the 'weight'of new evidence.Strength refers to such aspects of the evidence as salience and extremity,whereas weight refers to statistical informativeness,such as sample size.According to Griffin and Tversky,in revising their forecasts,people focus too much on the strength of the evidence,and too little on its weight,relative to a rational Bayesian.In the Griffin-Tversky framework,conservatism like that documented by Edwards would occur in the face of evidence that has high weight but low strength:people are unimpressed by the low strength and react mildly to the evidence,even though its weight calls for a larger reaction.On the other hand,when the evidence has high strength but low weight,overreaction occurs in a manner consistent with representativeness.Indeed,representativeness can be thought of as excessive attention to the strength of particularly salient evidence,in spite of its relatively low weight. To illustrate these concepts,Griffin and Tversky use the example of a recommendation letter. The'strength'of the letter refers to how positive and warm its content is;'weight'on the other hand, measures the credibility and stature of the letter-writer.8To illustrate these concepts, Griffin and Tversky use the example of a recommendation letter. The ‘strength’ of the letter refers to how positive and warm its content is; ‘weight’ on the other hand, measures the credibility and stature of the letter-writer. degree to which it is (i) similar in its essential properties to the parent popula￾tion, (ii) reflects the salient features of the process by which it is generated” (p. 33). For example, if a detailed description of an individual’s personality matches up well with the subject’s experiences with people of a particular profession, the subject tends to significantly overestimate the actual probability that the given individual belongs to that profession. In overweighting the representative description, the subject underweights the statistical base rate evidence of the small fraction of the population belonging to that profession. An important manifestation of the representativeness heuristic, discussed in detail by Tversky and Kahneman, is that people think they see patterns in truly random sequences. This aspect of the representativeness heuristic is suggestive of the overreaction evidence described above. When a company has a consistent history of earnings growth over several years, accompanied as it may be by salient and enthusiastic descriptions of its products and management, investors might conclude that the past history is representative of an underlying earnings growth potential. While a consistent pattern of high growth may be nothing more than a random draw for a few lucky firms, investors see ‘order among chaos’ and infer from the in-sample growth path that the firm belongs to a small and distinct population of firms whose earnings just keep growing. As a conse￾quence, investors using the representativeness heuristic might disregard the reality that a history of high earnings growth is unlikely to repeat itself; they will overvalue the company, and be disappointed in the future when the forecasted earnings growth fails to materialize. This, of course, is what overreaction is all about. In a recent study, Griffin and Tversky (1992) attempt to reconcile conserva￾tism with representativeness. In their framework, people update their beliefs based on the ‘strength’ and the ‘weight’ of new evidence. Strength refers to such aspects of the evidence as salience and extremity, whereas weight refers to statistical informativeness, such as sample size.8 According to Griffin and Tversky, in revising their forecasts, people focus too much on the strength of the evidence, and too little on its weight, relative to a rational Bayesian. In the Griffin—Tversky framework, conservatism like that documented by Edwards would occur in the face of evidence that has high weight but low strength: people are unimpressed by the low strength and react mildly to the evidence, even though its weight calls for a larger reaction. On the other hand, when the evidence has high strength but low weight, overreaction occurs in a manner consistent with representativeness. Indeed, representativeness can be thought of as excessive attention to the strength of particularly salient evidence, in spite of its relatively low weight. 316 N. Barberis et al./Journal of Financial Economics 49 (1998) 307—343