Availability Bias in Investing : How it affects your Financial Decisions?

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One of my friends is working in an engineering company at senior management level. 60% of his personal investment portfolio consists of his employer company shares. When, I ask him why he is buying so many shares of his employer’s company. He always gives me details of performance and future plans of his company. When I discuss about other good companies and their results he is not ready to believe and invest in them. This is availability bias. We believe in information which is easily and readily available to us.  This is a very common bias. In above case of my friend he trusts his company like anything because that information again and again comes in front of him but don’t look at information about other companies or don’t trust them.  But when the same information about his company comes to me, I don’t give much importance to it because I also have similar information about other companies too. So importance of information about any company is similar and I analyse all the companies with same importance.

We create the picture of the world based on the information available to us. Also we give more importance to information which is served to us more dramatically or loudly rather than considering quantitative factors. To prove this I will ask you one question. Tell me the name of bath soaps available in India?  Now observe yourself you will easily come up with 3 to 4 names that first come to your mind than you start struggling and still can come up with 1 or 2 more names.  Now think why the first three names came to your mind immediately. Some of them have given very good advertisements again and again which you have seen and have made place in your brains. So you first come up with these names. This is availability bias. The other brands of soaps may be better than these soaps but as you have not been given that information about these soaps you remember these three and believe they are better. The things which are made available to you more number of times come immediately in our mind and we believe them more. Further if the ads are more dramatic we believe them more. We don’t go into quantities analysis.

I remember last year when we were going for the vacation in the month of June by plane and just one week before that my son saw a Tv programme on plane crashes, he clearly refused to come with us because he believed that there are high chances that our plane may crash. So by watching that programme on plane crashes probability of plane crash in his mind went up and his decision to travel by plane was influenced heavily by that information. If he had not seen that programme he could have easily traveled to planes for his whole life.

Human brains give more importance to easily available and recent information while taking any decisions.  One of my clients is working in an infrastructure company, the company was not doing well for last few years, and so overall company had not given any salary rise to employees this year. Around a month back when I was discussing his portfolio with him, as a part of my investment recommendation I suggested him to invest some of his funds in few infrastructure equity funds. These funds were specific thematic funds and will invest in share of infrastructure companies but he was very pessimistic about the future of infrastructure companies and was reluctant to invest in infrastructure funds because of low performance of his own employer company. Two days before I was writing this article, I received a call from him asking me to invest his funds in infrastructure funds, when I went into details to find why his behaviour changed I found that his company got few orders one after another and this was sufficient to convert his pessimism to optimism. So the information which was available to him was very positive about infrastructure industry so future image he was making was very bright. On the other hand upto few days back it was reverse because information available to him easily was not speaking well about future of infrastructure companies in India. When I was arguing with him and giving him information that infrastructure companies will do well he was not  was not ready to listen & consider the information that I was sharing. So we believe in the information that is easily available to us and start making very important investment decisions or life decisions on those basis.

Many clients when first come to me have bought lots of life insurance policies for investment. When I analyze those policies and tell them that they are not worth investing and they should buy insurance only for life cover and not for investment purpose. Their answer is simple that at the beginning of my career I saw all my colleagues & friends investing in life insurance policies so I thought it is correct approach and did the same. So they believed what information was available to them.

When entire media speaks well about the economy and markets, you will see that inflows in equity market will generally increase and vice versa. So when positive information is shown to us again and again we start believing it otherwise not.

Impact of Availability Bias : Due to effect of availability bias our decisions are biased towards the recent and easily available information. Sometimes we prefer wrong information to no information. There are two aspects of this point explained below.

 a) We Don’t try to find the information: We generally use the information that is easily available to us and don’t try to get the correct information or other information that is not easily available to us. Due to this approach sometimes we prefer wrong information to no information. This means that if wrong information is easily available we believe that rather than finding correct information. Due to this we buy brands which give more advertisements. Investors buy financial products which are shown to them. Suppose you are in touch of a lic agent he will recommend you life insurance policies and you will buy life insurance policies.

b) We digest the information in the form it is provided to us: We don’t try to analyze the information and accept it in the form it is shown to us. Few years back LIC had launched a single premium policy where money was doubling after 10 years. Few clients came to me with marketing leaflets sent by few agents claiming that policy gives 10% returns. Clients were asking me that 10% returns are very good so let us invest in that plan. They never realized that this 10% is a simple rate of return and not a compounded return. Compounded rate of return is close to 7.15% p.a. So they never analyzed the information that was given to them. This leads to wrong decisions.

How to avoid Availability Bias:

1) Look at information that is not easily available : Try to find information that is not easily available, also try to find information about products which you are not buying. This will make you slightly uncomfortable but make it a habit.

2) Meet the people who look differently than you : Try to meet and understand views of the people who think differently from you. If you believe that markets are good for investment than try to listen and understand the people who believe that markets are not good for investment right now.  Think and analyze their view and then take important investment decisions.

3) Give your past mistakes a hard look : look at the mistakes you made in past and analyze why you made these mistakes. Was there lack of information analysis or you relied on the information easily available. Make the necessary changes in your approach of looking at the information.  

To conclude with availability bias is a very serious bias and has significant impact on our decisions so while making our important financial decisions we should try to dig more information and try to analyse it in more details before we make and decisions.



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