Availability Bias

The availability bias is a rule of thumb, or mental shortcut that allows people to estimate the probability of an outcome based on how common or familiar that outcome appears in their lives.

People exhibiting this bias perceive easily recalled possibilities as being more likely than those scenario that are harder to imagine or difficult to work out.

Kinds of Availability Bias

1. Retrieve ability (Re-calling ability)2. Categorization3. Narrow range of experience4. Resonance

1. Retrieve ability (Re-calling ability)

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

Investors will choose investments based on categorical lists that they have available in their memory. In their minds, other categories will not be easily recalled and, thus, will be ignored.

Example:U.S. investors may ignore countries where potentially rewarding investment opportunities may exist because these countries may not be an easily recalled category in their memory.

3. Narrow range of experience

When a person possesses a too restrictive frame of reference from which to formulate an objective estimate, then narrow range of experience bias often results.

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

The extent to which certain, given situations resonate in comparison with individuals’ own, personal situations can also influence judgment.Example:Investors will choose investments that resonate with their own personality or that have characteristics that investors can relate to their own behavior. Taking the opposite view, investors ignore potentially good investments because they can’t relate to or do not come in contact with characteristics of those investments. For example, thrifty people may not relate to expensive stocks (high price/earnings multiples) and potentially miss out on the benefits of owning these stocks.

ADVICE

Generally speaking, in order to overcome availability bias, investors need to carefully research and think about investment decisions before executing them.

Focusing on long-term results, while resisting chasing trends, are the best objectives on which to focus if availability bias appears to be an issue.

Be aware that everyone possesses a human tendency to mentally overemphasize recent, newsworthy events; refuse to let this tendency compromise you.

The old axiom that “nothing is as good or as bad as it seems” offers a safe, reasonable recourse against the impulses associated with availability bias.

When selecting investments, it is crucial to consider the effects of the availability rule of thumb. For example, stop and consider how you decide which investments to research before making an investment. Do you frequently focus on companies you’ve read about in Business week or the Wall Street Journal or on investments that have been mentioned on popular financial news programs?

A Cornell University researcher named Christopher Gadarowski in 2001 investigated the relationship between stock returns and press coverage. He found that the stocks receiving the most press coverage actually went on to underperform the market in the two years following their exposure in the news. It is also important to keep in mind that people tend to view things that occur more than a few years ago as past history.

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.