What will your family be eating this Thanksgiving? When you sit down to the big feast, will there be a turkey on the table, or are you grilling steaks this year?
If you’re eating turkey, let’s consider how you may have decided to serve the traditional Thanksgiving bird this year. You probably saw lots of advertisements for turkey. Maybe you watched a Thanksgiving special in which a family sits down to a turkey dinner with all the trimmings. Maybe you saw news reports saying turkeys are being downsized this year because of limits on family gatherings during COVID-19. And maybe your mind just took a shortcut—associating Thanksgiving with turkey and making the easy decision to serve turkey this year, because you had it last year, and…well, it was an efficient decision for your brain to make.
Availability bias occurs when your brain confuses “easy” with “true.” People make decisions about many things in their lives based on information that comes from a variety of sources—events they’ve experienced, memories, social media, advertising, and more. In choosing to serve turkey, you may have fondly remembered a family gathering at which you ate a traditional Thanksgiving dinner. Because that information surfaced easily in your mind, it may have led you to think it’s also “true” that your family will want a traditional Thanksgiving dinner this year. (If it’s not too late, you might want to check—according to a 2019 study of 2,000 Americans, 26% said they didn’t want the usual Thanksgiving food options!)
Here’s another example: Do you plan to fly somewhere over the holidays? Does reaching your destination require making a stop at another airport along the way? Thanks to availability bias, you might have decided to fly through Houston instead of Chicago, because you remember getting stuck in Chicago during a snowstorm the last time you made the trip. Your memory of missing your connection, having to find a hotel room, battling crowds at the airline’s customer service counter, and long lines at security may have made you forget about all the other times when traveling through Chicago was painless and efficient. It’s easier to remember that bad layover, and now it seems true that any layover in Chicago will be riskier. The availability of your negative memory has biased your decision not to fly through Chicago this year.
Availability Bias and Investing
A perfect example of availability bias occurred in the first few months of 2020, as COVID-19 news headlines played havoc with the markets. Investors digested countless negative headlines and made comparisons to the other economic disasters they could immediately recall - the global financial crisis of 2009 and the Great Depression. Consequently, some people- including at least a couple of my clients - decided not to invest, not to allow us to rebalance their portfolio or to move their investments to cash until the markets improved.
What some investors missed during this time is due diligence. If the investors who were quick to get out of the market did some basic research, they would have found that historically, the markets have rebounded after previous crises, and over time, the good times have far outshone the bad. In addition, when attempting to time the market by getting in and out, they would have had to make two correct decisions - when to leave, and when to get back in. Do you know when the stock market might dip next, or when it might start a bull run? Me either!
Availability bias can also occur when an investor designs their portfolio. Instead of doing research or working with a financial adviser who understands their goals, time horizon and risk tolerance, the person may choose stocks based on recommendations from friends and family, or product advertising they’ve seen or heard. They may choose a mutual fund because they’ve seen ads for Schwab or Fidelity or Vanguard, even if they know nothing about the fund’s performance or risk.
Preventing Availability Bias
Part of my value as a financial adviser is in acting as an accountability partner for clients. Our firm follows a defined process to help clients clarify their goals, such as a comfortable retirement or leaving a legacy for future generations. At the start of our relationship, we discuss when the client would like to achieve these goals, and how much investment risk they are willing to take. Based on the client’s input, we conduct research and make recommendations that fit within the parameters the client has given us. In designing a portfolio, we consider that the markets will encounter ups and downs, but that at any point, the markets have already priced in all available information. That’s why we urge clients to take a long-term view and stick to their investment strategy, even if disaster strikes or a shiny new financial product comes along.
If you don’t work with a financial adviser, you can still avoid availability bias by creating your own process for evaluating a potential investment. A good first step is to write down your goals and determine when you would like to achieve them. Are you comfortable with a certain amount of risk or are you more comfortable playing it safe, even if it means you might earn less over time? Finally, think about your values and the types of investments that might align best with them. All these factors help determine your investing strategy.
When designing your portfolio, start by examining how well the stock, mutual fund or other potential investment fits with your strategy. Seek out multiple perspectives—not just the ones you agree with—and examine the motives of those making recommendations. Are they self-interested, or basing their recommendation on their own past experiences? Do your own research and weigh the facts as objectively as you can.
In good times and in bad, it’s easy to let behavioral biases affect the way we think about anything - from eating turkey at Thanksgiving, to investing in a “turkey.” Staying mindful about decision making, being aware of biases, and challenging the status quo can help you distinguish facts from noise and act with confidence.