The Halo effect is a form of ______ bias.

A. hindsight
B. representativeness
C. availability

Correct Answer: B

A trader with halo effect bias judges a company or a stock only on the basis of certain characteristics and ignores the others. In the halo effect, the investor transfers favorable company attributes into thinking that the stock is a good buy. This is a form of representativeness in which investors extrapolate past performance into future expected returns, leading growth stocks to become overvalued.