Andrew Lanoie is a Best Selling Author, Investor and Podcaster at The Impatient Investor, as well as Co-Founder of Four Peaks Partners.
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“Fools rush in where angels fear to tread.” —Alexander Pope
Why do 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 that what we hear and see in the news, social media, coffee shops and more 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 young 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 from 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 ’80s. 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, TV, 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.
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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 game the stock market by leveraging the internet and social media buzz to drive the stock of flailing brick-and-mortar gaming retailer Gamestop (GME) from a price of around $17 at the beginning of January to a record high of $469.42 on January 28.
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 U.S. Bull Market: BofA Merrill Lynch Strategist
Stock Market Keeps Rising, With No End in Sight
Don’t Fear the Bear
Why Bitcoin $100,000 Is Inevitable
Whatever is dominating social media, the news or water cooler talk has an easy in 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 that it will be different this time. There’s no reason to believe the bulls can’t run forever or that bitcoin can’t hit $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 everyone 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 his hunger 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 investments 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 toward 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 because everyone else is buzzing about it.
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