Availability bias - a mental shortcut that can wreck your investments

Availability bias: a mental shortcut that can wreck your investments

Human beings are prone to a whole range of biases that can lead us into poor investment decisions, and one of the most common is availability bias. It's a kind of mental shortcut that causes us to give far more weight than we should to whatever comes to mind most easily, a recent event, or a particularly dramatic one, for example. Left unchecked, it can quietly distort your judgement and damage your returns.

In this video, Tim Richards explains what availability bias is and why it's so powerful. As the name suggests, it's about how readily we can bring something to mind, a memory bias, in effect. Anything that makes an event easier to recall is more likely to sway our decisions. Recency plays a part, as does primacy: give people a list to read without asking them to memorise it, and they'll typically remember the first and last items best. But the biggest driver, Richards explains, is salience, when something dramatic happens and lodges firmly in the mind. Some of these memories are even multi-generational. The Wall Street Crash is a classic example: every time markets fall, the papers are full of warnings that this is the next Wall Street Crash. It never is, but the image lives on regardless.

You'll also learn how availability bias reaches far beyond investing, and can, in extreme cases, even cost lives. Richards points to a sobering example from the aftermath of 9/11. Alongside those who died in the attacks themselves, researcher Gerd Gigerenzer found that around 1,500 more people died on the roads over the following two years, because they chose to drive rather than fly, their judgement skewed by the vivid, available memory of the disaster.

The takeaway: don't underestimate the impact these biases have on your decisions, and don't assume you're somehow immune to them. Simply being aware that availability bias exists, and recognising when a recent or dramatic event may be distorting your thinking, is the first and most important step toward making calmer, more rational investment decisions.

Chapters / Key points

• What availability bias is and why it's so common
• Why it's essentially a memory bias
• How recency and primacy shape what we remember
• Why salience (dramatic events) is the biggest driver
• The Wall Street Crash and multi-generational memory
• How availability bias distorts investment decisions
• The tragic 9/11 example beyond investing
• Why awareness of your own biases is the crucial first step

Transcript

Availability bias: a mental shortcut that can wreck your investments

Robin Powell: There's a whole range of biases that human beings are prone to, that can cause us to make poor investment decisions. One of the most common is called availability bias, it's a sort of mental shortcut which means we give more prominence than we should to the first thing that comes to mind, a recent event, for example.

Tim Richards: Availability, as its name suggests, is about how readily we can bring something to mind. It's a kind of memory bias, effectively. So anything that can cause us to more readily recall something is more likely to bias us in terms of making a decision. So recency is one, primacy is another, so the first thing that happens in a sequence. Quite often, if you give people a list of things to read and to memorise, without telling them to memorise them, and then ask them to recall them, they'll remember the first and last. Primacy and recency. Salience is perhaps the biggest one. So salience is when something absolutely dramatic happens and it really sticks in the mind. And sometimes these things are multi-generational, so, for instance, the Wall Street Crash. Every time we have a market downturn, the papers are full of how it's the next Wall Street Crash. It never is, but it really does live in the memory.

Robin Powell: Availability bias doesn't just harm our investments. In extreme cases, it can even cost us our lives.

Tim Richards: One of the saddest ones I ever heard of was in the wake of 9/11. All those people died, but another fifteen hundred people died in the wake of 9/11 because instead of flying they got in their cars. There's a guy called Gerd Gigerenzer who did this research. And what he's shown is that there were, over the next two years, fifteen hundred fatalities on the roads around New York.

Robin Powell: So, don't underestimate the impact these sorts of biases have. And don't assume that you yourself are immune to them.