Heuristics are mental shortcuts or rules of thumb that individuals use to make decisions more efficiently, particularly under conditions of uncertainty. In behavioral finance and market psychology, heuristics significantly influence investor behavior and market dynamics. While these cognitive shortcuts can simplify decision-making processes, they often lead to systematic biases and errors.

One common heuristic is the representativeness heuristic, where investors judge the probability of an event based on how much it resembles a typical case. For instance, if a stock has performed well in the short term, investors may assume it will continue to do so, as it fits their mental model of a "good" stock, even though other important factors might suggest otherwise. Another heuristic, the anchoring heuristic, involves relying too heavily on an initial piece of information when making decisions. For example, if an investor hears that a stock is worth $50, they may anchor on that value and underestimate the significance of new information that suggests a different valuation.