According to the good folks at https://www.etmoney.com/blog/5-common-behavioral-biases-that-every-investor-must-avoid the “Availability Bias can best be defined as; “a mental shortcut that relies heavily on information that is easily available or places undue emphasis on immediate examples. It is the human tendency to think of events that come readily to mind; thus making such events more representative than is actually the case. Naturally, things that are most memorable, come to our mind most quickly. We tend to remember vivid events like plane crashes and lottery wins, leading some of us to overestimate the likelihood that our plane will crash or, more optimistically, that we will win the lottery. A study showed that people are more likely to purchase insurance to protect themselves after experiencing a natural disaster than they are to purchase insurance before such a disaster happens. Similarly, in investments, negative events that have led to severe market corrections are always at the top of the investor’s minds. However, investors tend to ignore market performance post the sharp correction.”
Our thought is that etmoney.com does a really good job of setting the table for a broader level of understanding as to the peril that investors face when they succumb to this bias. A very good example for all of us would be the relevance of the price of a gallon of gas. Several studies indicate that the percentage of cost that the average American uses in their monthly budget is roughly 5%.
We cite this figure because, from that percentage, the cost of a gallon of gas is relatively benign when compared to other items. However, because its price is plastered at nearly every street corner in the US, we believe its cost to be highly relative due to its ubiquitous availability.
We argue, if the price of toothpicks or tissues were posted at every street corner that we would most certainly claim their prices as relevant, when in fact they are not. The article goes on to cite very pertinent past examples such as; “For instance, in 2008, the markets crashed and the US S&P 500 index fell 37%. But, the following year, in 2009, the market bounced back with a return of 26.5%. After 2009 ended, a survey was conducted asking people how they thought the market performed that year. Likely due to the traumatic events of the recent crisis, two-thirds of respondents incorrectly thought the market was down or flat in 2009. There are far too many examples – Dotcom burst, the 2004 crash after the formation of new Government, the Global Financial Crisis, Greece Sovereign Crisis, Chinese devaluation in 2015. All this leads us to believe that the risk is more than it actually is and we make errors like not having the right asset allocation or not diversifying our investment enough.”
So very well said and we would simply add that it comes down to Clarity, knowing what you own and why as a combative step in eliminating this deceptive bias.
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