Behavioral Finance and Your Portfolio

12Information Processing Bias #4: Availability Bias

It is ironic that the greatest stock bubble coincided with the greatest amount of information available. I always thought this would be a good thing, but maybe it was not so good.

—James J. Cramer, financial news analyst for CNBC

Bias Description

Bias Name: Availability bias

Bias Type: Cognitive

Subtype: Information processing

General Description

The availability bias is a rule of thumb, or mental shortcut, that causes people to estimate the probability of an outcome based on how prevalent or familiar that outcome appears in their lives. People exhibiting this bias perceive easily recalled possibilities as being more likely than those prospects that are harder to imagine or difficult to comprehend.

One classic example cites the tendency of most people to guess that shark attacks more frequently cause fatalities than airplane parts falling from the sky do. However, as difficult as it may be to comprehend, the latter is actually 30 times more likely to occur. Shark attacks are probably assumed to be more prevalent because sharks invoke greater fear or because shark attacks receive a disproportionate degree of media attention. Consequently, dying from a shark attack is, for most respondents, easier to imagine than death by falling airplane parts. In sum, the availability rule of thumb underlies judgments about the likelihood or frequency of an occurrence based on readily available information, not necessarily based on complete, ...