Availability Bias

Deeper Explanation

Availability bias is the mental shortcut of using how easily examples come to mind as a proxy for how probable an event is. In most everyday situations, this heuristic is reasonable — common events generate many examples and are genuinely more probable. But in financial markets, it creates systematic mispricings. After a market crash, crashes feel very likely — examples are vivid, recent, and emotionally resonant. The availability of those examples makes the probability feel high, regardless of the base rate of crashes over long time horizons. This drives investors to underweight equities after crashes — precisely when expected returns are highest. After a long bull market, continued gains feel almost certain — crashes feel distant and theoretical, while gains are readily recalled. This drives overweighting equities when expected returns are lowest. Availability bias is amplified by media. Dramatic events — stock market crashes, corporate fraud, spectacular failures — receive disproportionate media coverage relative to their frequency. This means investors who consume financial media are systematically exposed to more coverage of dramatic negative events than would reflect their statistical frequency, biasing probability assessments toward the rare and dramatic. The corrective is base rate thinking: before allowing a vivid, available example to anchor your probability estimate, ask "what is the actual historical frequency of this type of event?" A market drawdown of 10% or more occurs in the average year one to two times. A drawdown of 20% or more occurs approximately once every four years. Knowing these base rates — and using them to anchor probability estimates — is more reliable than relying on the availability of recent examples.