Part IX in our Wealth psychology series: University of Toronto’s Avni Shah explains why our brains are so susceptible to “noise” — as in the news headlines we tend to hear the loudest — and how that can affect our investment decisions.
Availability bias is quite simply sensitivity to noise. We tend to judge things as more likely or more frequently-occurring if they come to mind readily. As humans, if something can be recalled easily, we believe it must be important. In the case of the car, we assume that brand X is more popular simply because it came to mind easily as we consider our choices.
This can also play out in your investments. You may judge the quality of an investment based on information that was recently in the news while you ignore other relevant facts. Your brain makes financial decisions based on time, money, and context. In this case, it's context of the decision that matters. The most recent news makes our brains more likely to make decisions based on the noise.
When it comes to your money, understanding your long-term financial goals and your risk tolerance can help break through the hype, keep your biases in check, and help you to make better financial decisions.