Causes Availability Bias
Availability bias occurs when individuals put undue emphasis on the information that is readily available. Individuals judge the probability of an event occuring by the ease with which they can recollect examples and instances. See the page on the availability heuristic for more information on the bias. On this page, we discuss the causes for the availability bias.
Retrievability bias
A first important cause of the availability bias is retrievability bias. If an answer or idea can be thought of quicker than others, it is often chosen as being the correct answer, even if it is not.
Categorization bias
Categorization bias is the tendency to place items in categories that share what individuals perceive as common characteristics. Once a security is put in a category (e.g. value stock or growth stock), the individual tends to treat all items within the category as being the same when making decisions rather than looking at the individual characteristics of each investment. In other words, people make the mistake of assuming the categories are better descriptors of reality than they actually are.
Narrow range of experience
Narrow range of experience results from an individual with less experience using his or her experience as a frame of reference when estimating probabilities for the population. He or she may over- or underestimate probabilities because of this bias. In statistics, this would be referred to as sample selection bias.
Resonance bias
Finally, resonance bias refers to the fact that a piece of information or an event may strike a chord with an individual’s own beliefs and desires. As a consequence, the individual may overweight the importance of the information when making decisions.
Summary
We discussed a set of overlapping biases that may cause an availability bias among individuals. Availability bias causes people to choose only investments that they are familiar with, overreact to recent market conditions, and place too much emphasis on events that get more media attention.