On this episode of The Impatient Investor, Andrew explains what availability bias is and how it can impact investing choices. Whatever is dominating social media, the news or water cooler talk can easily influence investors’ decision-making, and is in part how bubbles are created.

“Are you leery of availability bias? Why not avoid it all together like elite investors, to bring balance to your investment strategy, make time to do your own research and due diligence.”

 

FULL TRANSCRIPTION:

Here’s a great quote to start off today’s episode. “Fools rush in where angels fear to tread,” and Alexander Pope said that. And why is that relevant to today’s podcast? Well, let’s first start with why fools rush in. It’s likely because they’re suffering from availability bias. Which according to psychologists says, “we subconsciously base our decision-making on what’s at the forefront of our minds.” This could be memorable news, events, and buzz, or whatever is current or most easy to recall.

That means what we hear and see in the news, social media, or coffee shops may sometimes have more sway in our opinions and decision-making than any other factors. Availability bias says that the more buzzworthy, memorable, or exciting a piece of news or event is, the greater the likelihood of its influence on our opinions and choices.

What do you think a child is more likely to die from, a gun or drowning? You would think that for all the headlines, guns garner that a child is more likely to die from this weapon than drowning in a pool. But the statistics say otherwise, and it’s not even close.

Also because of availability bias, we feel a sense of what we are hearing and seeing now is a permanent trend not likely to go away soon. This reminds me of growing up in the eighties. The Soviet Union was public enemy number one, and it seemed the nuclear war was always around the corner. That’s because the Soviet Union and nuclear weapons dominated the news and popular culture.

Everywhere you turned movies, TVs, music videos, you couldn’t escape it. In Rocky IV, Rocky’s opponent was a huge Russian. Tom Cruise took on Russians in Top Gun. As a kid, I was convinced that we were all going to die in a sea of atomic fire in a war with the evil empire and nothing was going to convince me otherwise.

Availability bias permeates investing choices as well. Availability bias magnifies stock market volatility because investors tend to overreact to the latest news and buzz. Availability bias helps explain in part how a group of users on Reddit can gain the stock market by leveraging the internet and social media buzz to drive the stock of flailing brick and mortar gaming retailer GameStop from the price of around $17 at the beginning of January to a record high of $469.42 on January 18th.

The problem with availability bias is that investors assume that if something is in the news or garnering buzz, it must be important. They don’t question the reliability of the information. This leads to overreaction, where investors believe that it must be right or good if everyone else is doing it.

If the stock market is bullish, availability bias can put that bull on steroids because investors think the surge is permanent. A Bitcoin ripple can turn into a tsunami. Large voices in the industry hailed as experts only fuel the availability bias fire. Check out some of the recent headlines about the bull market and the Bitcoin boom “no end in sight for US Bull market BofA Merrill Lynch strategist,” “stock market keeps rising with no end in sight,” “don’t fear the bear, why a $100,000 Bitcoin is inevitable.”

Whatever is dominating social media, the news or water cooler talk has an easy end to influence investors’ opinions and decision-making potentially outweighing any sound underlying economic fundamentals. This is in part how bubbles are created.

Availability bias clouds judgment. Just as with bubbles in the past, investors today are convinced it will be different this time. There’s no reason to believe the bulls can’t run forever or that Bitcoin can’t hit a $100,000, $200,000, and so on.

Elite investors know better. They avoid availability bias by not playing in the same sandbox as everyone else. They understand human nature and they’re not so arrogant as to believe that they’re not susceptible to the same human foibles as everyone else. I’m sure they were hoarding toilet paper just like the rest of us in the early days of the pandemic, even though toilet paper manufacturers assured us, there was plenty of supply.

Here’s the difference between elite investors and everyone else. They take themselves out of harm’s way. It’s like the guy with an eating problem who chains the fridge at night and gives the key to his spouse, so he can’t satisfy as hungry at midnight. When midnight rolls around, he’ll have the urges. He can’t do anything about it.

Elite investors don’t swim in the public pool with the kiddies. They prefer alternative assets in the private markets, ones with long lockup periods. These long-term investments help elite investors avoid availability bias by preventing them from acting on their urges and whims.

And they gravitate towards long-term private equity and real estate investment plays where underlying economic fundamentals, numbers and analysis still matter where mob thinking has no sway and where they can make reliable financial projections based on historical data and sustainable trends unclouded by emotions.

Are you leery of availability bias? Why not avoid it altogether like elite investors, to bring balance to your investment strategy, make time to do your own research and due diligence. Don’t jump into an investment just because everyone else is buzzing about it.

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