What is availability bias in investment decision making?
For investors, availability bias affects the trading decisions that people make based on recent events or headlines, expecting such events to be more frequent than they actually are.
Availability bias is a strategy used to make decisions quickly. Still, it often leads to mistakes (Dimara, Dragicevic, & Bezerianos, 2016)—the tendency of young investors to have irrational behavior and affect investment performance. Another factor that can affect satisfaction in investing is stock investment literacy.
The availability bias is a cognitive shortcut that relies on what immediately comes to mind to make quick decisions and judgments. The information might be derived from recent or particularly vivid memories. It might also be based on personal experience or fueled by outside sources such as news outlets or the internet.
If someone has recently heard about lottery winners, they may be more likely to buy lottery tickets, even though the odds of winning are very low. This is because the recent news about the jackpot win is easily available and memorable to them, making winning the lottery more likely than it actually is.
For this reason, it is also known as recency bias or availability bias. For example, the financial crisis in 2008 and 2009 led many investors to exit the stock market. Many had a dismal view of the markets and likely expected more economic hardship in the coming years.
The availability heuristic, sometimes known as the availability bias, is a type of cognitive bias that can lead to systematic errors in thinking.
In behavioral economics, recency bias (also known as availability bias) is the tendency for people to overweight new information or events without considering the objective probabilities of those events over the long run.
If you're making an important decision, the only way to get around the availability heuristic is to stop and go through the relevant information, rather than assuming whatever comes to mind first is correct. #4. Keep track of information you might need to use in a judgment far off in the future. Don't rely on memory.
The availability bias can be harmful because it often leads us to make decisions based on what's most immediate to our memories, rather than on all relevant information. This can skew our perception of reality and lead to poor judgment.
Availability bias occurs due to the natural human tendency to rely disproportionately upon the most readily available data. It can also occur in the use of artificial intelligence in healthcare if algorithms place greater emphasis on the most readily available data which does not fully represent the target population.
What is an example of availability bias in hiring?
Availability bias
For example, it might be easy to recall an interviewee who made an impression on you because you both worked at the same organisation in the past. This, however, risks crowding out memories of less memorable candidates and thereby impacting your final decision.
The availability bias (or availability heuristic) refers to the tendency people have to rely on information that is easier to recall when faced with a decision.
Availability bias is a cognitive bias that occurs when people make judgments based on information that is readily available to them, rather than seeking out additional information that may be more relevant or accurate.
This bias occurs when people heavily rely on information that is readily available in their memory or easily accessible. In other words, the more easily something can be recalled or imagined, the more likely it is to be perceived as being more significant, important, or prevalent.
It can also affect an investors perception of risk, believing recent market events demonstrate a trend, which could leave the investor at risk of market fluctuations.
The availability heuristic can lead to bad decision-making because memories that are easily recalled are often insufficient for figuring out how likely these things are to happen again. Ultimately, our overestimation leaves us with low-quality information to form the basis of our decisions.
People overestimate the risk of shark attacks because there are far more news stories and movies about them. As a result, images of shark attacks are easier to bring to mind. If you can quickly think of multiple examples of something happening, then you are tricked into thinking it must happen often.
Investors with availability bias are more likely to overreact to market news. For instance, these are the investors who create volatility in the market after an unexpected earnings announcement. These investors also trade excessively when there is news of a product recall by the company.
- Acknowledge your bias. The first step in defeating unconscious bias is to be honest with ourselves. ...
- Learn more about you. Ask a trusted friend or colleague for candid feedback. ...
- Extend your comfort zone. ...
- Take responsibility for mitigating bias. ...
- Admit mistakes.
According to the availability heuristic theory proposed by Daniel Kahneman in "Thinking, Fast and Slow," people tend to judge the frequency, probability, or importance of an event based on how easily examples of it come to mind.
What is the availability bias in communication?
Availability bias, also called the availability heuristic, is when we make quick judgments based on the most readily available information but not necessarily the most representative information.
- Sampling bias – when the sample is not representative of the population.
- Voluntary response bias – the sampling bias that often occurs when the respondents in the sample volunteered to participate.
- Self-interest study – bias that can occur when the researchers have an interest in the outcome.
Set high standards for your thought process, making sure you allot time and effort to gathering evidence to shape your opinions. Form a diverse team that has a variety of experiences and viewpoints. The natural tendency to challenge each others' ideas will help to limit availability bias.
Here are a few examples of how you can present your availability in a good manner: "Available for full-time work with a flexible schedule" "Available to work Monday to Friday, 9 am to 5 pm" "Available to work evenings and weekends"
The manager will remember the mistake of the second candidate more vividly and, due to the availability heuristic, give the mistake more weight. The manager will intuitively promote the first candidate, although both had previously made identical mistakes.
References
- https://www.investopedia.com/recency-availability-bias-5206686
- https://www.scribbr.com/frequently-asked-questions/what-is-the-difference-between-availability-bias-vs-confirmation-bias/
- https://www.investopedia.com/terms/b/behavioralfinance.asp
- https://enhancv.com/blog/how-do-i-write-my-availability-on-a-resume/
- https://www.techtarget.com/whatis/definition/availability-bias
- https://www.edi.nih.gov/blog/opinion/unconscious-bias-and-public-servant-what-can-we-do-overcome-unconscious-bias
- https://go.mccombs.utexas.edu/Blog-Workplace-Biases.html
- https://math.libretexts.org/Courses/Fullerton_College/Math_100%3A_Liberal_Arts_Math_(Claassen_and_Ikeda)/07%3A_Statistics/7.03%3A_Sources_of_Bias
- https://www.pkgroup.co.uk/what-is-recency-bias/
- https://dovetail.com/employee-experience/what-is-the-availability-heuristic/
- https://fs.blog/availability-bias-cognitive-distortion/
- https://managementstudyguide.com/availability-bias-in-behavioural-investing.htm
- https://www.linkedin.com/pulse/56-decoding-availability-bias-must-know-facts-k-c-barr-udmme
- https://jbmp.umsida.ac.id/index.php/jbmp/article/download/1661/1854
- https://www.theuncertaintyproject.org/bias/availability-bias
- https://nfppeople.com.au/2017/02/are-these-five-unconscious-biases-affecting-your-nfps-recruitment-decisions/
- https://www.economicsonline.co.uk/definitions/availability-bias.html/
- https://www.verywellmind.com/availability-heuristic-2794824
- https://catalogofbias.org/biases/availability-bias/
- https://thosenerdygirls.org/availability-bias/
- https://thedecisionlab.com/biases/availability-heuristic
- https://www.quora.com/Based-on-the-book-Thinking-Fast-and-Slows-availability-heuristic-theory-why-are-people-less-impressed-by-a-car-after-listing-many-of-its-advantages
- https://www.alooba.com/skills/concepts/cognitive-biases/availability-bias/
- https://www.scribbr.com/research-bias/availability-heuristic/
