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Investing

Availability Bias

4 Jan 2021
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The next cognitive bias we’ll look at is known as the availability bias. When confronted with a decision, human thinking tends to be influenced by what is personally relevant, salient, recent, or dramatic. Put another way, humans estimate the probability of an outcome based on how easy that outcome is to imagine.

Consider the following rather gloomy example. In the months after the 9/11 terrorist attacks, travellers decided that travelling to their destination by car was far safer than by aeroplane. In light of the very recent (at the time), salient and dramatic events of 11 September 2001, this decision seemed at first glance an obvious and wise one. The probability of danger when travelling by aeroplane seemed much greater than travelling by car; when you think about it, at that time, it was far easier to imagine something terrible happening when travelling by air.

However, this was the availability heuristic at work. The truth of the matter was that firstly, air travel had never been safer than in the months following 11 September 2001, on account of the vastly increased security measures taken by the US Transportation Security Administration. And secondly, on account of far more people being on the roads come holiday time, there were inevitably many more road fatalities. Upon examination of the statistics, it was overwhelmingly more dangerous to drive than to fly (US road fatalities in October to December 2001 were well above average). Yet, the availability bias humans suffer from made many Americans feel that driving was the smarter choice. This decision-making error cost many people their lives.

The availability bias is exceedingly evident when it comes to shark attacks too. Even though there were only 17 unprovoked shark bites in Australia in 2020, while over 1,100 Australians were killed on the roads that same year, we can imagine being attacked by a shark far more easily than we can be in a motor vehicle accident… thanks mainly to the movie Jaws and the media hysteria that ensues every time a shark attacks someone. Across the planet, bees and falling coconuts are responsible for more deaths than sharks annually, and yet they lack the drama and histrionics to truly capture our imaginations. And as such, we perceive them to be less likely when statistically, death by these causes is far more likely.

As in every area of our lives, we also apply this bias in the world of investing. For instance, availability bias can result in us paying more attention to stocks covered heavily by the media as the availability of information on a stock influences our tendency to invest in that particular stock. While this can work in our favour at times, it is essential to be wary of following the latest market fad simply because of the availability of information. Like with confirmation bias, be sure to avail yourself of all information pertaining to any given stock and look at the fundamentals for a sign of its real value, rather than simply the headlines it attracts or the attention it garnishes.

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