Chapter 8

Availability Bias
Prepared By : DR. Wael Shams EL-Din
Cognitive Biases
Cognitive Biases
Information Processing Errors Belief Perseverance errors
1. Cognitive dissonance Bias
1. Framing Bias
2. Illusion of Control Bias
2. Anchoring Bias 3. Self attribution Bias
3. Mental Accounting Bias 4. Conservatism Bias
5. Overconfidence Bias
4. Availability Bias 6. Confirmation Bias
FAMA 7. Ambiguity aversion Bias
8. Representativeness Bias
9. Hindsight Bias
10. Recency Bias
CISCO CAR HR
Availability Bias

People tend to heavily weight their decisions toward more

recent information, making any new opinion biased toward
that latest news. This happens in real life all the time.
Technical Description
❑ People assume that available thoughts, ideas, or images represent
unbiased indicators, So people estimate the outcome of certain events
according to the degree of which memories or examples of similar events
can be retrieved from memory.
❑ In an other word impressions created from imagination and past
experience combine together and construct a range of possible outcomes.

There are 4 categories of availability Bias:-

1. Retrieveability
2. Categorization
3. Narrow range of experience
4. Resonance
Retrieve-ability
❑ Investor will choose investment based on information that is
available to them (advertising, suggestions from advisors,
friends, etc.) and will not engage in well-organized research
or due diligence to verify that the investment selected is a
good one.
❑ Most investors, if asked to identify the “best” mutual fund
company, are likely to select a firm that engages in heavy
advertising.
❑ In reality, the companies that manage highest-performing
mutual funds do little or no advertising. Investor who
overlook these funds in favor of more widely shown
alternatives may represent retrieve-ability / availability bias.
Categorization
❑ Categorization mean how people attempt to categorize
information that matches a certain reference. Investors will
choose investments based on categorical lists that they have
available in their memory, in the same time many other
categories will not be easily recalled and, thus, will be
ignored.

❑ For example U.S. investors may ignore countries where

potentially rewarding investment opportunities may exist
because these countries may NOT be an easily recalled
category in their memory.
Narrow Range of Experience
❑ Investor will choose investment that fit their narrow range
of life experiences, such as the industry they work in, the
region they live in, and the people they associate with.
❑ for example Investor who work in the technology industry
may believe that only technology investments will be
profitable.
Resonance
❑ Investor will choose investment that resonate with their
own personality or that have characteristics that investor
can relate to their own behavior. Taking the opposite view,
investor ignore potentially good investment because they
can’t relate to or do not come in contact with characteristics
of those investments.

❑ For example Cautious people may not relate to expensive

stocks (high price/earnings multiples) and potentially miss
out the opportunity to get the benefits of owning these
stocks.
Availability Bias Test
Question 1
Suppose you have some money to invest and you hear about a great stock
from your neighbor who is known to have a good stock market sense. he
recommends you to purchase shares in mycrolite company, that makes a
new kind of lighter fluid. What is your response to this situation?

A. I will likely buy some shares because my neighbor is usually right

about these things.

B. I will likely take it under advisement and go back to my house and do

further research before making a decision.

If you select “A” you are inclined to availability bias

Availability Bias Test
Question 2
Suppose that you are planning to buy stock in a generic drug maker called
“Generics Plus.” Your friend Marian sent you a report on the company and
you like the story, so you plan to purchase 10,000 shares.
Before you do, you hear on a popular financial news show that “GN
Pharmaceuticals,” another generic drug maker, just reported great earnings
and the stock is up 10 percent on the news.
What is your response to this situation?
A. I will likely take this information from the company report as
confirmation and proceed with my purchase of Generics Plus.
B. I will pause buying Generics Plus and request research on GN
Pharmaceuticals prior to proceeding with the purchase of Generics Plus.
C. I will purchase GN Pharmaceuticals instead of Generics Plus because
GN appears to be a hot stock and I want to get in on a good thing.

If you select “C” you are inclined to availability bias

Availability Bias & Investment
Mistakes

1. Retrieve-ability 2. Categorization

3. Narrow range of
experience 4. Resonance
Investment Mistakes (1) & Mitigation
Retrieve-ability
❑ Investor will select investment
based on information that is
available to him, for instance
advertising, suggestions from
advisors, friends,… etc.) and
will not engage in meticulous
research or due diligence to
verify that the investment
selected is a good one.
Mitigation
❑ Generally speaking and in order
to overcome availability bias,
investor need to perform careful
research and plan any
investment decision before any
execution.
❑ Investor must Focus on long-
term results and resist any
chasing or trends.
❑ Investor must be aware that
everyone of us has a human
tendency to recent news and
events.
❑ Always remember old proverb
“Nothing is as good or as bad as
it Seems” ‫ليس كل ما يلمع ذهبا‬
Investment Mistakes (2) & Mitigation
Categorization
❑ Investors will select investment
based on categorical lists that they
have available in their memory.
Other categories will not be easily
recalled and, thus, will be
ignored.
❑ For example, U.S. investor may
ignore countries where possibly
rewarding investment opportunity
because these countries may not
be an easily recalled category in
his memory.
Mitigation
❑ Generally speaking and in order
to overcome availability bias,
investor need to perform careful
research and plan any investment
decision before any execution.
❑ Investor must use an investment
Policy Statements.
❑ Investor have to build his
decisions based on detailed
researches and studies
❑ Investor have to focus on long
term investment goals.
Investment Mistakes (3) & Mitigation
Narrow Range of
Experience
❑ Investor will select investment
that fit their narrow range of
life experiences, such as the
industry they work in, the
region they live in, and the
people they associate with.
❑ For example, investor who
work in the technology industry
may believe that only
technology investment will be
profitable.
Mitigation
❑ investor need to perform careful
research and plan any investment
decision before any execution.
❑ Investor must Focus on long-term
results and resist any chasing or
trends.
❑ Financial advisor have to set an
investment Policy Statements.
❑ Investor have to build his decisions
based on detailed researches and
studies
❑ Investor have to focus on long term
investment
Investment Mistakes (4) & Mitigation
Resonance
❑ Investor will select investment
that resonate with their own
personality or that have
characteristics that investor can
relate to their own behavior.
❑ Taking the opposite view,
investor ignore potentially good
investments because they can’t
relate to or do not come in
contact with characteristics of
those investments. For example
Cautious people may not relate
to expensive stocks (high
price/earnings multiples) and
potentially miss out on the
benefits of owning these stocks.
Mitigation
❑ investors need to perform careful
research and plan any investment
decision before any execution.
❑ Investor must Focus on long-term
results and resist any chasing or
trends.
❑ Financial advisor have to set an
investment Policy Statements.
❑ Investor have to build his decisions
based on detailed researches and
studies
❑ Investor have to focus on long term
investment
❑ Availability bias is a cognitive bias,
so it can be corrected with updated
information.
Availability Bias in Brief
Item Explanation
What ❑ Focus in information that is easy to find
❑ Focus on easily remembered past experiences
❑ Depending on rule of thumb ( ‫)بحكم التجربة‬
Consequences ❑ Easley remembered
❑ Understood events perceived as being more possible
❑ Select investment based on advertising
❑ May lead to lack of diversification because they limit
their opportunities
❑ over invest in firms that have echo around them
❑ Common issue with analysts
Mitigation ❑ Use an investment Policy Statements
❑ Detailed researches and studies
❑ Focus on long term investment
Thank You