Definition: The availability heuristic refers to the tendency to judge the likelihood of an event based on how easily examples come to mind.
How it Impacts Investors: Let’s say you are considering investing in a particular industry, and you have heard several negative stories about companies in that industry recently. This might lead you to believe that investing in that industry is riskier than it is because the negative stories are more readily available to you.
Be aware: It is important to be mindful of the availability heuristic when making investment decisions, as it can lead you to overestimate the likelihood of certain events occurring.
How to handle: To handle the availability heuristic, seek out a diverse range of information, including both positive and negative examples. It can also be helpful to consider the larger context in which the event is occurring and to use data and statistics to objectively evaluate the likelihood of different outcomes.
- “Thinking, Fast and Slow” by Daniel Kahneman
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