Shark Week and Making Sound Investment Decisions: Availability Bias

Video Transcription:

I remember as a kid if we were going swimming we were not allowed to eat 30 minutes prior to going in the water. For some reason my mom and my grandma would flip out, they would think that we would drown.

Eating Before Swimming & Availability Bias

What the heck does eating before you swim have anything to do with money? Well, I am glad you asked. There’s something called availability bias. What availability bias says is that:

Information that is most recent, most relevant, and that is traumatic influences our thinking.

Here we are as kids about to go swimming and just because we just ate my mom thinks we’re going to drown. Why? Well, I think part of it has to do with culture, both my parents are Cuban and I think that’s something that they were taught as kids growing up. In fact, on a trip to Cuba several years back I saw this sign at a pool.

I’m going to chalk it up to availability bias; what is most relevant will influence thinking. So for my mom and my grandma, I was relevant to them. That’s how they were raised and what they were taught so, therefore, they projected it onto us.

Shark Week & Availability Bias

Availability bias is me not wanting to get into the ocean at the beach the week after watching Shark Week because I think I’m going to get attacked by a shark. I know that a shark’s not going to attack me. Statistically, it’s so low but I have all these images of people getting attacked by a shark because I just watched Shark Week. It’s a terrible idea to watch Shark Week the week before you go to the beach. That’s availability bias.

Investing & Availability Bias

Availability bias is someone being afraid to invest in the stock market because of a traumatic experience in 2008. As we go back closer to 2008 that experience was more recent; you’re hearing things in the news about fear, about the volatility of the market and that information is influencing your thinking today or possibly influencing your thinking today.

Here’s the reality, if we are basing or making decisions based off of perceived truths “I’m going to get attacked by a shark,” “I’m going to drown if I get into the pool after eating,” or “I’m going to lose money because if I get into the stock market. I’ll lose money” or “I know someone who lost money in 2008 so therefore I’m going to lose money.” Often Times we’re making poor decisions.

When we’re making financial decisions it’s important that you make your decisions based off of truth as opposed to perceptions. Let me give you an example as it relates to investing. If you look at a 20-year trailing period. So if we look at December 2017 and we go back 20 years to December 1997 over that 20 year period the S&P 500 (one of the most accepted indexes that we use to measure market performance) was up 7.2% per year.  That’s 7.2% on average per year.

Certainly, there were bad years like 2008 and there are really good years like 2009, but on average if you’re invested in the S&P 500 you are up 7.2%. The average investor according to a Dalbar study over that same 20 year period was up 5.2% per year on average; under performing the market.

There were a couple of questions as to why did they under perform the market. One of the responses to that if you looked at investor behavior after big market drawdowns people were still making decisions based on their experiences when the market was down. The reality is since 2008, since the recession the stock market, the S&P 500 has been in a bull market for over nine years; the longest bull market in history.

Don’t Miss Out

If I don’t get in the ocean after watching Shark Week because I think I’m going to get attacked by a shark I’m going to miss out on fun. If I have to wait thirty minutes before I get into the water after I eat then I’m not going to have as much fun as everyone else. If I’m making poor financial decisions off of perceived truths as it relates to the market or some other financial matter then I may be making a poor decision.

So my question to you is are you making financial decisions based off of perceptions as opposed to truth? What are some of those perceptions that need to be challenged? Don’t hesitate to reach out to me.