Premium Essay

Availability Bias

In: Business and Management

Submitted By manojm
Words 4725
Pages 19
Table of Contents

Availability Bias 2
Overreaction Bias 6
Research Report Analysis 8
Illustrations 12
Conclusion 14
Bibliography 15

Availability Bias
Availability bias is a human cognitive bias that causes us to overestimate probabilities of events associated with memorable or dramatic occurrences. A cognitive bias is a pattern of deviation in judgment that occurs in particular situations. A cognitive bias can also be explained as a flaw in judgment which is caused by memory, social attribution, and statistical errors. Since, memorable events are further magnified by coverage in the media; the bias is compounded on the society level. Two well-known examples would be estimations of the probability of plane accidents and the kidnap of children. Both events are quite rare, but the huge majority of the population outrageously overestimates their probability, and behaves accordingly.
In reality, one is more likely to die from an auto accident than from a plane accident, and a child has a higher risk of dying in an accident than the risk of getting kidnapped. Availability bias is at the root of many other human biases and culture-level effects. Availability bias is a cognitive illusion.
The availability biasis a mental shortcut that occurs when people make judgments about the probability of events by how easy it is to think of examples. The availability bias operates on the notion that, "if you can think of it, it must be important." The availability of consequences associated with an action is positively related to perceptions of the magnitude of the consequences of that action. In other words, the easier it is to recall the consequences of something, the greater we perceive these consequences to be. Sometimes, this heuristic is beneficial, but the frequencies that events come to mind are usually not accurate...

Similar Documents

Premium Essay

Behavioral Hueristics

...Behavioral Heuristics 1. Describe an example from your own career where you, or another manager, allowed behavioral heuristics or another pitfall, to sway you from the mean. When I worked at Sysco Foods, the vice president of sales wanted to expand the territories. My direct manager knew that the Vice President had just recently relocated from Tallahassee, Florida to Jacksonville Florida. My direct manager wanted to impress the vice president and build Tallahassee market quick. It was 3 hours away from our warehouse and we had never been in that area, nor did we know what our competition was. A decision was made and very little research was performed to ensure that we were doing the right thing. Instead of building out territories that were already in existence, my direct manager wanted to show that his sales team could do anything. He sent 4 reps out to the area for a week. Whoever could obtain the most accounts they would win the territory. No one wanted the territory. It was 2-3 hours from all of the sales representative’s home offices, and starting a territory from scratch is a difficult task. I specialized in institutional accounts. I was of the mindset that I would rather sell $10,000 to one account a week, then 10 accounts each buying $1,000. I went to the hospitals, the jails, prisons, and the universities in the area. Within 6 weeks I had grossed sales of 40,000 a week just in those 6 accounts. My direct manager and vice president......

Words: 786 - Pages: 4

Premium Essay

House for Rent

...House for Rent From day to day business and personal relationships, there are many instances when one finds themselves in a negotiation or bargaining position with one or more persons involved. When deciding to relocate for a two year venture my with current employer for an assignment, the decision to sell the four-bedroom, two-bathroom Tudor style house I own was decided that was not my best option. However, gaining a lessee would be the next best option. A real-estate friend has found a possible lessee and negotiation a lease would be the next step. In the following, the negotiating and bargaining process will be addressed; who the parties are, specified individual and collaborated goals, as well as behaviors and bargaining style that should be represented. The one primary goal of negotiation is to reach an agreement between two or more parties. To be more specific, Harvard Law School describes negotiating as more of a process; this is "the discussion between two or more disputants, who seek to find a solution to a common problem, one that meets their needs and interests acceptably" (The President and Fellows of Harvard College, 2014). Within any bargaining and negotiation, there cannot be less than two disputants. In this particular scenario, the disputants would be myself and a thirty-something, single male who is beginning a two-year residency in a local hospital as a doctor. Each disputing party also has goals that need to be met. For the hospital resident, his......

Words: 1442 - Pages: 6

Premium Essay


...more difficult to retrieve once outcome knowledge has been provided and that, in many cases, foresight knowledge may actually conflict with hindsight knowledge, one method suggested by Fischhoff (1975) to assimilate outcome data makes use of heuristics as proposed by Tversky and Kahneman (1973, 1974). Of particular relevance to our study, Fischhoff argued: THE HINDSIGHT BIAS 441 A second heuristic leads judges to evaluate an outcome's likelihood by the relative "availability" of scenarios leading to its occurrence and nonoccurrence. The judge who knows what happened, and has adjusted his perceptions in the light of that knowledge, may well find it difficult to imagine how things could have turned out otherwise. (1975, p. 298) Our purpose was to investigate the role of the availability heuristic with regard to outcome knowledge. If hindsight knowledge facilitates the use of heuristics because it inhibits access to the foresight state-of-mind as suggested by Fischhoff (1975), then accompanying biases or distortion in probability estimates should be present in hindsight judgments. THE AVAILABILITY HEURISTIC One such distortion that may be evident in hindsight can be inferred from the work of Slovic, Fischhoff, and Lichtenstein (1980), who found that people greatly...

Words: 507 - Pages: 3

Premium Essay

Random Essay to Join This Weebsit

...identify a way to mitigate or overcome the biased judgment. (Ch. 5). Availability tendency- The tendency for decision makers to consider information that is easily retrievable from memory as being more likely, more relevant, and more important for a judgment. A way to mitigate bias to this tendency is by using awareness, consider why something comes to mind, make the opposing case, consult with others, and obtain and consider objective data. Confirmation tendency- The tendency for decision makers to seek for and put more weight on information that is consistent with their initial beliefs or preferences. To mitigate the bias caused by this tendency we must be aware of the tendency, make the opposing case, consider alternative explanations, and Consider disconfirming or conflicting information. Overconfidence tendency- The tendency for decision makers to overestimate their own abilities to perform tasks or to make accurate diagnoses or other judgments and decisions. The way we can mitigate bias of this this tendency is by being aware, challenging expert or advisors estimates, challenging extremely high or low estimates, and challenging underlying assumptions behind the estimates. Anchoring tendency- The tendency of decision makers to make assessments by starting from an initial numerical value and then to adjust insufficiently away from that initial value in forming a final judgment. We can mitigate bias of this tendency by being aware of significant anchors, making an......

Words: 414 - Pages: 2

Free Essay

Decision Heuristics

...failure to ignore base rates, discuss the relevant factors of why associated with the decision and if the decision was framed properly to ascertain a better decision. Literature Review (Shanteau, 1989) suggested that (Kahneman and Tversky, 1982) exemplified their view of heuristics and biases as follows: "In making pre dictions and judgments under uncertainty, people do not appear to follow the calculus of chance or the statistical theory of prediction. Instead, they rely on a limited number of heuristics which sometimes yield reasonable judgments and sometimes lead to severe and systematic errors.” (Kahneman & Tversky, 1982) went on to identify three of several cognitive heuristics for risk judgments- representativeness, availability, and anchoring-and-adjustment. * Representativeness – (Shanteau, 1989) referenced (Kahneman and Tversky, 1984) as explaining the representativeness heuristic to describe making an uncertainty judgment on the basis of the degree to which the judgment is similar in essential properties to its parent population and also if the judgment reflects the prominent features of the process by which it is generated. Evidence to support these two...

Words: 1506 - Pages: 7

Premium Essay

Quiz 1

...A new brand of baby diapers Correct Answer: A new brand of baby diapers Question 3 2 out of 2 points Which of the following products should be sold face-to-face rather than by mass advertising? Answer Selected Answer: A pharmaceutical which can only be understood by doctors Correct Answer: A pharmaceutical which can only be understood by doctors Question 4 2 out of 2 points Suppose a social activist collecting information on the level of air pollutants in sparsely populated regions concludes that pollution levels are positively related to population. Since her sample set is restricted only to sparsely populated regions her outcome would be erroneous due to: Answer Selected Answer: selection bias. Correct Answer: selection bias. Question 5 2 out of 2 points Which of the following is a root cause behind competition inherent in every society? Answer Selected Answer: Scarcity of goods and services Correct Answer: Scarcity of goods...

Words: 1462 - Pages: 6

Free Essay

New Coke Case Study

...and highly subjective based on the person and the information available to them. This is definitely apparent to me when making minor decisions such as where to eat for dinner. When thinking about risk, incidences that are more interesting or shocking to consumers are a lot more known and have a lot more prevalence in media, creating the availability bias that these incidences occur more than they do. This could be hazardous for risks that are less “sexy” and that people do not think a lot about. For example, in the example of estimates of deaths from accident vs. diabetes, the actual result where diabetes is four times more likely to occur than an accident is frightening. Consumers should be more cautious of preventing diabetes. Without this awareness due to selective media coverage, consumers are focusing on the wrong things that could be detrimental to their health or wellbeing. I have learnt about the law of large numbers from my statistics classes, but learning about the law of small numbers showed me how people tend to exaggerate the degree to which a small sample will resemble the population. This reminds me of the availability bias where estimates for the population are based on estimates from available knowledge of small samples. We have huge assumptions about populations based on small and unrepresentative knowledge or experiences. It was also interesting learning about Gambler’s Fallacy from a marketing perspective after learning about it in my decision...

Words: 349 - Pages: 2

Free Essay

Phychology in Life ACCA, a hard major which has a lot of classes and tasks. At the end of her freshman year, she decided to double major in finance, believing that she could succeed in both majors. However, her advisor suggested she not do so, because many ACCA students before her tried to double major but few of them accomplished because of the heavy tasks for ACCA. But she stuck to her decision. A half year later, she felt too tired to keep on and finally withdrew from finance. This is an example of belief perseverance because my friend stuck to her belief that she could finish her double major, even though convincing evidence of students who gave up before showed that it was very difficult. My friend’s experience on Nov. 1st is related to hindsight bias, which refers to people’s tendency...

Words: 912 - Pages: 4

Free Essay


...12/19/14 Systematic Traps and Biases in Professional Judgment: Insights from Research in Psychology Douglas F. Prawitt, PhD, CPA Brigham Young University The Emerging Science of Judgment • Rapid change, increased complexity in business • Greater importance of professional judgment The Emerging Science of Judgment • Rapid change, increased complexity in business • Greater importance of professional judgment Fortunate coincidence: A critical mass of insight on human judgment emerging— 30+ years of research in economics, management, and cognitive psychology bearing fruit 12/19/14 Ambitious goals for today • Introduce a model—common vocabulary and framework • Explain importance of proactive “reframing” and identify common pitfalls in applying the judgment model • Identify and explain judgment biases, and how to mitigate their impact Visual Perception Professional Judgment: The process of reaching a conclusion where there are a number of possible alternative solutions and uncertainty is involved. 12/19/14 Professional Judgment: The process of reaching a conclusion where there are a number of possible alternative solutions and uncertainty is involved. ‐‐A simple process‐oriented professional judgment framework is helpful… The KPMG Professional Judgment Framework © 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are......

Words: 1172 - Pages: 5

Premium Essay

Behavioural Finance

...provide explanations for why people make irrational financial decisions .It calls for investigation into higher mental processes, memory, perception, problem solving and thinking .This paper looks at some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, review underlying reasons and biases that cause some people to behave irrationally. 2.- Brief survey of the literature The following areas of research have been covered, from the mid 1980’s to the main focus of the article(special edition 2008): Overreaction and Availability Bias, Overconfidence, Cultural difference, Superstition, education and life experience, “house money effect” managerial optimism, collective orientated vs individual dynamic, or Gambler's Fallacy, Trading venue affect, life experience and education, media influence, Herd Behavior, Gender influence and availability heuristic. While...

Words: 899 - Pages: 4

Free Essay

The Role of Anchoring Bias in the Equity Market

...However, the implications of these potential cognitive biases for investors and, even more so for managers, are less understood. This study considers the behavior of financial market participants from a perspective different from that of previous research. It focuses on anchoring bias, a topic that has been characterized by Hirshleifer (2001) as an important part of “dynamic psychology-based assetpricing theory in its infancy” (p. 1535). “Anchoring” describes the fact that, in forming numerical estimates of uncertain quantities, adjustments in assessments away from some initial value are often insufficient. One of the first studies of this cognitive bias is the seminal experiment by Kahneman and Tversky (1974). These authors report that estimates of an uncertain proportion (the percentage of African nations in the United Nations) were affected by a number between 0 and 100 that was determined by spinning a wheel of fortune in the subjects’ presence. Subsequent research (reviewed in Section 2) has confirmed the generality and the robustness of this cognitive bias. We hypothesize that market participants such as sell-side analysts and investors may also be affected by such anchoring bias when they estimate the future profitability of a firm. This estimation...

Words: 4553 - Pages: 19

Premium Essay

Sytem 1

...System One Thinking Everyday that we wake up we use system 1 and system 2 thinking just to get our day started. There are clear differences between the two types of thinking and when we are dealing with system 1 by itself we tend to be dealing with situations where we need to be fast and quick on our feet to come up the answers or reactions that we need. System 1 is defined as “operates automatically and quickly, with little or no effort and no sense of voluntary control” (Kahneman, 2008). So when I think of system one thinking I think of everyday task that I do to get myself through the day, for an example when I am brushing my teeth I don’t have to think very hard and long about where I need to put the toothpaste or how to brush my teeth. When we are dealing with anchoring heuristics and system 1 thinking there are many situations that I can think of where anchoring heuristics may raise some biases when we are using system 1. One heuristic that I can think of is when you are looking to buy a used car from a dealership they have a price set and when you look at the price they are asking you automatically come back with a counter offer. Here we are using system 1 because we don’t have to sit and think very long about the price we want to pay, a lot of times people already have the price in mind for what they want to pay before they even get to the dealership. With anchoring heuristics come cognitive biases, even if it’s not on your end. What cognitive biases are......

Words: 933 - Pages: 4

Free Essay


...Instructor’s Manual to Accompany The Longman Writer Rhetoric, Reader, Handbook Fifth Edition and The Longman Writer Rhetoric and Reader Fifth Edition Brief Edition Judith Nadell Linda McMeniman Rowan University John Langan Atlantic Cape Community College Prepared by: Eliza A. Comodromos Rutgers, The State University of New Jersey New York San Francisco Boston London Toronto Sydney Tokyo Singapore Madrid Mexico City Munich Paris Cape Town Hong Kong Montreal NOTE REGARDING WEBSITES AND PASSWORDS: If you need a password to access instructor supplements on a Longman book-specific website, please use the following information: Username: Password: awlbook adopt Senior Acquisitions Editor: Joseph Opiela Senior Supplements Editor: Donna Campion Electronic Page Makeup: Big Color Systems, Inc. Instructor’s Manual to accompany The Longman Writer: Rhetoric, Reader, Handbook, 5e and The Longman Writer: Rhetoric and Reader, Brief Edition, 5e, by Nadell/McMeniman/Langan and Comodromos Copyright ©2003 Pearson Education, Inc. All rights reserved. Printed in the United States of America. Instructors may reproduce portions of this book for classroom use only. All other reproductions are strictly prohibited without prior permission of the publisher, except in the case of brief quotations embodied in critical articles and reviews. Please visit our website at: ISBN: 0-321-13157-6 1 2 3 4 5 6 7 8 9 10 - D O H - 05 04 03 02 CONTENTS ...

Words: 78100 - Pages: 313

Premium Essay

Decision Making Individual

...Week 6 Lecture 1: Decision Making Individuals Definition of decision making: it is a process of making a choice among several action alternatives. It involves a commitment of resources to some course of action. Assumptions of rational decision making model: Problem clarity: clearly defined and unambiguous Know options: identify all relevant criteria and viable alternatives in an unbiased manner Clear preferences: the criteria and alternatives can be ranked and weighted. Constant preferences: constant decision criteria and weights assigned to them are stable over time No time/cost constraints: full information is available Maximum payoff: the choice alternative will yield the highest economic value (a rational decision making process: define the problem—identify the criteria—allocate weights to the criteria—develop alternatives—evaluate the alternatives—select the best alternative Types of judgments and decisions: Normative: how X should be chosen/ judged in optimal/ rational conditions Descriptive: how X actually gets chosen/ judged The reasons why descriptive decisions are different from normative decisions: Bounded rationality: time cost constraints; incomplete information; perceptiual errors in obtaining information; cognitive load in information retention and performing caluculations Bounded decision making: We seek solutions that are the best given the information that is available; that are satisfactory (good enough) We satisfice rather......

Words: 2954 - Pages: 12

Free Essay

Herd Behavior

...THE JOURNAL OF FINANCE • VOL. LVI, NO. 4 • AUGUST 2001 Investor Psychology and Asset Pricing DAVID HIRSHLEIFER* ABSTRACT The basic paradigm of asset pricing is in vibrant f lux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models. The best plan is . . . to profit by the folly of others. — Pliny the Elder, from John Bartlett, comp. Familiar Quotations, 9th ed. 1901. IN THE MUDDLED DAYS BEFORE THE RISE of modern finance, some otherwisereputable economists, such as Adam Smith, Irving Fisher, John Maynard Keynes, and Harry Markowitz, thought that individual psychology affects prices.1 What if the creators of asset-pricing theory had followed this thread? Picture a school of sociologists at the University of Chicago proposing the Deficient Markets Hypothesis: that prices inaccurately ref lect all available information. A brilliant Stanford psychologist, call him Bill Blunte, invents the Deranged Anticipation and Perception Model ~or DAPM!, in which proxies for market misvaluation are used to predict security returns. Imagine the euphoria when researchers discovered that these mispricing......

Words: 33427 - Pages: 134