Don’t be Fooled by Tornados
Availability Bias is the tendency to overweight recent information in decision making. Dramatic events that rarely occur are especially impactful because they are more easily recalled. It is becoming increasingly problematic for modern day decision making given the volume of information that needs processed.
People are also susceptible to the availability bias when we are in a hurry, stressed, distracted, or tired. We focus on less of the information available and make our decision based on something that happened recently or easily comes to mind because this is an efficient way to move forward.
Availability bias manifests itself in subtle ways as well. Say you are buying a car and the purchase price is $19,990.85 and you are tempted to upgrade it with a souped up stereo system bringing the total price to $20,950.35. If you wouldn’t spend $959.50 to upgrade the stereo system in your existing car you shouldn’t necessarily upgrade it in the new car either.
You are basing your decision on the most recent information provided to you regarding enhanced audio as part of the process to purchase a new car. In this context, where the upgraded stereo is not a high percentage of the overall purchase price the offer is tempting. Whereas if you evaluated the stereo upgrade based on your historical preferences for enhanced audio you might have a different perspective on its importance and value.
A more consequential example was the potent cocktail that led people to pour money into real estate leading up to the financial crises. Anywhere you looked another news outlet was reporting on how rapidly home prices were appreciating and everyone knew someone who had gotten rich in real estate. The fear of being left out motivated a lot of people to enter the market based on recent events and personal experience versus broader historical trends. When evaluated against historical trends the pace of appreciation at the time seemed unsustainable. In hindsight this turned out to be the case inflicting severe harm on people when the bubble burst.
Dramatic Events and Their Impact on Decision Making
People are more likely to purchase protection after negative events as opposed to before them. After a natural disaster strikes insurance purchases to protect against the same disaster in the future skyrocket even though the risks have not increased. Because the sensationalized way these events are covered make people susceptible in the aftermath to pitches for protection whether it is really warranted or not. This is an error in judgment driven by answering the wrong question. How easily does a disaster come to mind? Instead of the right question which is how often does this type of disaster actually occur and given this probability should I insure myself against this risk?
While admittedly not dramatic this explains why I purchased mine subsidence insurance for a previous home I lived in. The cost was minimal relative to the value of the home and it was an arguably justifiable expense. The home inspector who was excellent and consistently provided trustworthy advice didn’t think it was necessary though. Leading up to the inspection there had been a story I saw on the news about a house being swallowed up by the ground. So despite the advice of the inspector I purchased the insurance which cost me $1200 in aggregate over the course of the six years I lived in the home.
Availability bias has personal financial implications as well. Death is a dramatic and vivid possibility for everyone. This is why people are much more likely to have the proper amount of life insurance versus disability insurance even though you are 6 times as likely to become disabled. Unless you have personal experience with someone living with a disability you are unlikely to be properly insured. Because someone hurting themselves falling off a ladder while cleaning the gutters on their house doesn’t receive media coverage.
Resisting Availability
It may be proper to change your mind when new information becomes available. People form opinions and make choices directly expressing their feelings though. Don’t react instantly to how you feel . When something does come to your attention that impacts your opinion try to think of a counterpoint example and see if that makes you reevaluate the situation.
Another tactic is try to list as many arguments as you can in favor of your choice. So if you are thinking of buying a new car try to come up with a dozen reasons why you should instead of say six. You will probably be able to rattle off six easily and feel confident in your decision to buy. If you have to list 12 you may struggle to come up with the last few which counter intuitively will make you re-evaluate your need for a new car.
Because it turns out if you have more trouble coming up with reasons to purchase the car than expected you might start thinking you don’t really need the car. Of course if you rattle off twelve easily you’ll probably be pumped to buy a new car. This is why the exercise is valuable. If you have twelve reasons for buying the car it is probably something you’ve considered for a while and you are not reacting too heavily to easily remembered information.
I tried this myself and could only come up with 9 and the last 2 made my brain start sweating. I wasn’t feeling too keen on purchasing a new car once this happened.
- Current Car has over a 10000 miles
- Want better mileage to save on gas.
- Want interior with up to date technology
- Have always dreamed of car X
- Need more room for traveling
- My neighbor just got a new car
- Paint is starting to rust
- Need more power
- Car is dirty and I don’t feel like getting it cleaned
Also, try to think in terms of numbers. While this is challenging since most people’s natural thought processes are visually oriented. Thinking in terms of numbers forces you to evaluate the decision in a quantified way. So instead of going by the first impression that pops into your head you are forced to evaluate the actual probabilities related to potential outcomes and assess your risks. If I had done this before deciding to purchase mine subsidence insurance I would have discovered that claims are often less than $10,000 and are made infrequently. Including numbers may have resulted in a more reasoned decision versus a decision made based on the image that popped into my mind of a home being swallowed up by the ground.
Photo courtesy of Getty Images
He's published three books. Most recently The World After Covid 19: Coexisting with the Novel Coronavirus.
His musings can be found at stevenlmiller.me. Subscribe to The Pompatus Times for updates.
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