Ecologically valid and invalid heuristics and the perceived relationship between risk and return: A competing heuristics approach

Whereas the ecological correlation between risk and expected return in financial markets is positive, the correlation between the judgments of risk and return (the r-r correlation) is often negative. This has been attributed to the operation of a single, ecologically in valid, heuristic, the affect heuristic. In the current work we show that risk and return judgments are often influenced not only by the affect heuristic, but also by an ecologically valid heuristic labeled the risk→return heuristic, which leads to a positive r-r correlation. We also show that the tendency to rely on this heuristic is related to participant’s expertise with financial markets.