Availability Bias in Personal Finance
How does availability bias affect personal finance?
- Samir bought 100 shares of a company. His reasoning was that there was a lot of news in the papers about its good potential. His friend who works in that company regularly gives him information about its great performance and other positive news. When his financial advisor suggested other stocks in the same sector which had the same or even more potential, he refused to listen. He might be right in his choice but this bias might distort perception of risk and can result in costly errors.
- When some products are covered excessively by different media channels, we tend to favour that product and buy it irrespective of whether we need it or not. If these are expensive products, they can lead to disorder in our finances.
- Many people who have just started to work buy insurance products because they see their colleagues buying insurance products. They are 'wrongly advised' to buy insurance products to reduce tax liability. These are not the best rationale to buy insurance. Insurance is to be taken for different reasons that are more important.
Ways to Avoid Availability Bias in Personal Finance
- Give equal importance to all kinds of information that you receive, be it from your friends, from the Internet or from your financial advisor. Analyse them thoroughly and equally to make the most optimum decision.
- If there is only one kind of news and information on some event or an investment product, look for alternate views and news. Do not decide on the basis of readily available information. It will be a biased decision and can be erroneous. For example, if there is a lot of pessimistic news about the economy and markets, you need not panic and sell off all your investments. Economic and market cycles have uptrends and downtrends. So consider all investments carefully and decide which ones you want to stay invested in and which are better to be sold off.
- Buy products and services that you need and do not go on an unnecessary buying spree because your friends and neighbours have purchased something. It is important to stay within budget.
- Ensure that you create a long-term financial plan and always keep that perspective while making financial decisions.
Do not get swayed by emotions and biases. Stay on track by reviewing your portfolio regularly, analysing news and views on your investments and checking with your financial advisor (if you have one) before deciding on financial matters.