(Note: this is reading material for your understanding and also for exam, Assignments point of

view, besides for detailed understanding you must have to read the chapters from book of
behavioral finance mentioned with topics also)

Availability Bias (chapter 8)

The availability heuristic, also known as availability bias, is a mental shortcut that relies on
immediate examples that come to a given person's mind when evaluating a specific topic,
concept, method or decision.

The availability bias is the human tendency to think that examples of things that come readily to
mind are more representative than is actually the case. The psychological phenomenon is just
one of a number of cognitive biases that hamper critical thinking and, as a result, the validity of
our decisions.
The availability bias results from a cognitive shortcut known as the availability heuristic, defined
as the reliance on those things that we immediately think of to enable quick decisions and
judgments. That reliance helps us avoid laborious fact-checking and analysis but increases the
likelihood that our decisions will be flawed.
Naturally, the things that are most memorable can be brought to mind most quickly. However,
there are a number of factors that influence how well we remember things. For example, we
tend to remember things that we observed ourselves more easily than things that we only
heard about. So, for example, if we personally know of several startups and all of them are
successful, we are likely to overestimate the percentage of startups that succeed, even if we have
read statistics to the contrary.
Similarly, people remember vivid events like plane crashes and lottery wins, leading some of
us to overestimate the likelihood that our planes will crash or, more optimistically -- but equally
erroneously -- that we will win the lottery. In these cases, the availability bias leads some people
to avoid flying at all costs and leads others to rely on a big lottery win as a retirement plan.
Other cognitive biases include the confirmation bias, which involves giving undue credence to
materials that support our own beliefs and attitudes, and the self-serving bias, which involves
putting a positive spin on our own activities and interpreting ambiguous data in a way that suits
our own purposes.
Cognitive biases are among a number of types of errors that humans are prone to. Awareness of
the tendency to make such errors is one of the first steps required to improve our capacity for
critical thinking.
How can you prevent Availability Bias?
Avoiding Availability Bias
1. Build a team with diverse experiences and points of view. ...
2. Seek broad input from your team. ...
3. Set high standards for clear thinking. ...
4. Utilize your network when making decisions. ...
5. Take on an attitude of continuous learning and apply it on the job and demand it of
others.
Why is availability heuristic a source of bias?
There are two biases emanating from the availability heuristic (a.k.a. the availability bias):
Ease of recall and retrievability.
Because of the availability bias, our perceptions of risk may be in error and we might worry
about the wrong risks. This can have tragic impacts.

Don't think you'll win an argument with one prominent example. If you try that you might be
showing Availability Bias
Availability Bias is the tendency to let an example that comes to mind easily affect decision-
making or reasoning. When making decisions or reasoning, the Availability Bias occurs when a
story you can readily recall plays too big a role in how you reach your conclusion
How the Availability Heuristic Works
When you are trying to make a decision, a number of related events or situations might
immediately spring to the forefront of your thoughts. As a result, you might judge that those
events are more frequent or probable than others. You give greater credence to this information
and tend to overestimate the probability and likelihood of similar things happening in the future.
For example, after seeing several news reports about car thefts, you might make a judgment that
vehicle theft is much more common than it really is in your area. This type of availability
heuristic can be helpful and important in decision-making. When faced with a choice, we often
lack the time or resources to investigate in greater depth.
Faced with the need for an immediate decision, the availability heuristic allows people to quickly
arrive at a conclusion.
This can be helpful when you are trying to make a decision or judgment about the world around
you.
For example, would you say that there are more words in the English language that begin with
the letter t or with the letter k? You might try to answer this question by thinking of as many
words as you can that begin with each letter. Since you can think of more words that begin with
t, you might then believe that more words begin with this letter than with k. In this instance, the
availability heuristic has let you to a correct answer.
In another example, researchers have found that people who are more easily able to recall seeing
antidepressant advertising were also more likely to give high estimates about the prevalence of
depression.
How is the availability heuristic used?
The availability heuristic judges the probability of events by how quickly and easily examples
can come to mind. We make decisions based on the knowledge that is readily available in our
minds rather than examining all the alternatives
Why is availability heuristic important?
This type of availability heuristic can be helpful and important in decision-making. When
faced with a choice, we often lack the time or resources to investigate in greater depth. Faced
with the need for an immediate decision, the availability heuristic allows people to quickly
arrive at a conclusion.
Availability Heuristic and Incorrect Decisions
The term was first coined in 1973 by Nobel-prize winning psychologists Amos Tversky and
Daniel Kahneman. They suggested that the availability heuristic occurs unconsciously and
operates under the principle that "if you can think of it, it must be important." Things that come
to mind more easily are believed to be far more common and more accurate reflections of the
real world.
As Tversky and Kahneman explained, one of the most obvious examples of the availability
heuristic in action is the impact of readily available examples.
Common Pitfalls of Availability Heuristic
Like other heuristics, the availability heuristic can be useful at times. However, it can lead to
problems and errors. Reports of child abductions, airplane accidents, and train derailments often
lead people to believe that such events are much more typical than they truly are.
For example, after you see a movie about a nuclear disaster, you might become convinced that a
nuclear war or accident is highly likely. After seeing a car overturned on the side of the road, you
might believe that your own likelihood of getting in an accident is very high. Plus, the longer you
stay preoccupied with the event, the more available it will be in your mind and the more probable
you will believe it to be.
The problem is that certain events tend to stand out in our minds more than others. Excessive
media coverage can cause this to happen, but sometimes the novelty or drama surrounding an
event can cause it to become more available in your memory. Because the event is so unusual, it
takes on greater significance, which leads you to incorrectly assume that the event is much more
common than it really is.
Availability Bias Examples
Here are several common and notable examples of availability bias, to help you better
understand how it manifests in everyday life:
 Buying lottery tickets: It’s really not even worth buying lottery tickets, because the
probability that you’ll win is so infinitesimally small. But people do it, in large part
because lottery organizers spend so much time and energy publicizing those who’ve
previously won. When people consider buying tickets, they think about all of those
who’ve won in the past (whom they’ve seen on TV, and so forth), rather the massive
majority of those who haven’t won. Availability bias causes them to rate their own
likelihood of winning much more highly—so they choose to buy a ticket. This makes
lotteries a hugely profitable business model for the organizers.
 Assessing climate change: Climate change is all about the general trend of warming
throughout the globe, not individual days or even years. But when they’re in the midst of
a cold winter, people may tend to believe that climate change isn’t really happening,
because their larger beliefs about the state of the global climate are most strongly
influenced by the recent weather in their area. This is why, in attempting to assess
whether climate change is really happening, it’s important to look at average
temperatures and weather patterns—because our minds are so easily skewed by what we
personally are experiencing most recently.
 After seeing news reports about people losing their jobs, you might start to believe that
you are in danger of being laid-off. You start lying awake in bed each night worrying that
you are about to be fired.
 After seeing several television programs on shark attacks, you start to think that such
incidences are relatively common. When you go on vacation, you refuse to swim in the
ocean because you believe the probability of a shark attack is high.
 After reading an article about lottery winners, you start to overestimate your own
likelihood of winning the jackpot. You start spending more money than you should each
week on lottery tickets.
 After seeing news stories about high-profile child abductions, you begin to believe that
such tragedies are quite common. You refuse to let your child play outside by herself and
never let her leave your sight.
A Word From Very well
Heuristics play an important role in how we make decisions and act upon information in the
world around us. The availability heuristic can be a helpful tool, but it is also important to
remember that it can sometimes lead to incorrect assessments.
Just because something looms large in your memory does not necessarily mean that it is more
common, so it can be helpful to rely on numerous tools and decision-making strategies when you
are trying to make a choice
ADVICE:
Generally speaking, in order to overcome availability bias, investors need to carefully research
and contemplate investment decisions before exe- cuting them. Focusing on long-term results,
while resisting chasing trends, are the best objectives on which to focus if availability bias ap-
pears to be an issue. Be aware that everyone possesses a human tendency to mentally
overemphasize recent, newsworthy events; refuse to let this tendency compromise you. The old
axiom that “nothing is as good or as bad as it seems” offers a safe, reasonable recourse against
the impulses associated with availability bias. When selecting investments, it is crucial to
consider the effects of the availability rule of thumb.
For example, stop and consider how you decide which investments to research before making an
investment. Do you frequently focus on companies you’ve read about in Business week or the
Wall Street Journal or on investments that have been mentioned on popular financial news
programs? A Cornell University researcher named Christopher Gadarowski in 2001 investigated
the relationship between stock returns and press coverage. He found that the stocks receiving the
most press coverage actually went on to underperform the market in the two years following
their exposure in the news.5 It is also important to keep in mind that people tend to view things
that occur more than a few years ago as past history.
For example, if you got a speeding ticket last week, you will probably reduce your speed over
the course of the next month or so. However, as time passes, you are likely to revert to your old
driving habits. Likewise, availability bias causes investors to overreact to present-day market
conditions, whether they are positive or negative. The tech bubble of the late 1990s provided a
superb illustration of this phenomenon. Investors, swept up in the euphoria of the “new
economy,” disregarded elementary risks. When the market corrected itself, these same investors
lost confidence and over- focused on the short-term, negative results that they were experiencing.
Another significant problem is that much of the information investors receive is inaccurate and is
based on insufficient information and multiple opinions. Furthermore, the information can be
outdated or confusingly presented.
Availability bias causes people to attribute disproportionate degrees of credibility to such
information when it arrives amid a flurry of media attention. Many investors, suffering from
information overload, overlook the fact that they often lack the training, experience, and
objectivity to filter or interpret this deluge of data. As a result, investors often believe themselves
to be more accurately informed than is, ultimately, the case. Because availability bias is a
cognitive bias, often it can be corrected with updated information.