It is always good to be better informed but sometimes the last thing we read, or what is publicized the most, can have a disproportionate impact on our view of the way things are.
This leads us to another fun concept of behavioral finance called the Availability Heuristic. The Availability Heuristic is a rule of thumb in which decision makers assess the probability of an event by the ease with which instances can be recalled. The Availability Heuristic is affected the most by Vividness, Recency Effect, & the Frequency Effect. Let’s break that down a little.
A good example of vividness is when managers conduct performance reviews of their staff, they often rely heavily on memory rather than documented evidence. Vivid instances that are easy to recall (both favorable and unfavorable) will appear more numerous, and hence will be weighted more heavily.
Continuing with that example involving the Recency Effect, managers carrying out annual performance reviews also tend to give more weight to performance during the 3 months prior to the evaluation than the 9 months prior to that.
Finally, the Frequency Effect. While we may be annoyed or bored by repeated exposure to the same advertisement on TV, evidence suggests that this bombardment of information makes the product easier to recall, and does, in fact, increase the likelihood that we will purchase it over the one right next to it that we haven’t heard of.
All three of these feed into the Availability Heuristic and impact the way we make decisions. So how can we combat this? Try researching both sides at the same time rather than one before the other to avoid recency. Try using written facts rather than
As with all of the behaviors we discussed these past few weeks the best defense against ourselves is to be aware of them in the first place. Best of luck!