Professional Documents
Culture Documents
Availability Bias
Availability Bias
Ideas that are retrieved most easily also seem to be the most credible.
Example:
Investors will choose investments based on information that is available
to them (advertising, suggestions from advisors, friends, etc.) and will
not engage in disciplined research or due diligence to verify that the
investment selected is a good one.
2. Categorization
Example:
Investors will choose investments that fit their narrow range of life
experiences, such as the industry they work in, the region they live in,
and the people they associate with. For example, investors who work in
the technology industry may believe that only technology investments
will be profitable.
4. Resonance
For example, if you got a speeding ticket last week, you will probably
reduce your speed over the course of the next month or so. However, as
time passes, you are likely to revert to your old driving habits. Likewise,
availability bias causes investors to over react to present-day market
conditions, whether they are positive or negative. The tech bubble of the
late 1990s provided a superb illustration of this phenomenon. Investors,
swept up in the euphoria of the “new economy,” disregarded elementary
risks. When the market corrected itself, these same investors lost
confidence and over focused on the short-term, negative results that they
were experiencing. Another significant problem is that much of the
information investors receive is inaccurate and is based on insufficient
information and multiple opinions. Furthermore, the information can be
outdated or confusingly presented. Availability bias causes people to
attribute disproportionate degrees of credibility to such information
when it arrives amid a flurry of media attention. Many investors,
suffering from information overload, overlook the fact that they often
lack the training, experience, and objectivity to filter or interpret this
deluge of data. As a result, investors often believe themselves to be more
accurately informed than is, ultimately, the case. Because availability
bias is a cognitive bias, often it can be corrected with updated
information.