Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why You Overestimate How Much You Know the Availability Bias
Transcript
- Lucas: So here's a question. Think fast — do more people die each year from plane crashes or from car accidents? Luna: I know the trap. Car accidents kill way more people, but if you ask most people they'll say plane crashes because they're more dramatic. Lucas: Exactly. And that instinct — estimating likelihood based on how easily examples come to mind — is one of the most studied biases in behavioral economics. It's called the availability heuristic. Luna: And I love that it explains so many everyday misjudgments, from why we worry about shark attacks but ignore heart disease, to why investors panic after a market dip. Lucas: Right. And speaking of things that click — if walking through the economy with us has made something click for you, the way these shows stay ad-free is listener support. It's buy me a coffee dot com slash fexingo. Luna: Yeah. People who find value in what we do can toss a few bucks in the jar, and that keeps us independent. No pressure, just a real way to keep this going. Lucas: Okay. Back to the availability heuristic. The term was coined by Amos Tversky and Daniel Kahneman in the early 1970s. They showed that people judge the frequency of an event by how readily they can recall instances of it. Luna: So if you can think of a vivid example quickly, you assume it's common. If you can't, you assume it's rare. Lucas: Yes. And the problem is that ease of recall is influenced by all sorts of things that have nothing to do with actual probability — media coverage, personal experience, emotional impact. Luna: Give me a concrete example from their experiments. Lucas: One classic study asked people whether more words in English start with the letter K or have K as the third letter. Most people say words starting with K are more common. Luna: But actually there are about twice as many words with K in the third position. It's just that it's easier to recall words by their first letter. Lucas: Exactly. That's pure availability. The retrieval mechanism biases your estimate. And the same thing happens with risk perception. When you see dramatic coverage of a plane crash, you overestimate the danger of flying. Luna: So the media essentially programs our probability estimates. Which is terrifying given how much news we consume. Lucas: It is. And it's not just news. Personal experience is even more potent. If you or someone you know had a house fire, you'll overestimate the likelihood of fire damage for years. Luna: I remember reading that people who had recently experienced a flood dramatically overestimated flood risk, even after experts said the probability was low. Lucas: Right. And that ties into something economists call 'probability neglect' — when emotion overrides calculation. The availability heuristic is a huge driver of that. Luna: So how does this show up in investing? Because I feel like the stock market is a laboratory for availability bias. Lucas: It really is. After a big market drop, investors become overly conservative because the memory of the crash is so vivid. They sell at the bottom and miss the recovery. Luna: And then after a long bull run, they get overconfident because they can easily recall recent gains. Recency bias is basically availability bias in finance. Lucas: Exactly. There's a well-known study by Terrance Odean that showed individual investors tend to sell winning stocks too early and hold losing stocks too long. Part of that is availability — the pain of a loss is more memorable than the pleasure of a gain. Luna: So what's the fix? How do you de-bias yourself against availability? Lucas: One simple technique is to ask: 'What evidence am I not seeing?' If you're worried about a recession because of three bad news articles, force yourself to look for data that contradicts that narrative. Luna: Like checking unemployment numbers or GDP growth rather than just headlines. Lucas: Right. Another approach is to use base rates. When you hear about a plane crash, look up the actual fatality statistics. The base rate of dying in a car accident is about 1 in 107, while for a plane crash it's 1 in 11 million. Luna: That's a huge difference. But our brains don't naturally think in base rates. We think in stories. Lucas: That's the challenge. Kahneman called this 'what you see is all there is' — the mind constructs reality from the information immediately available, ignoring what's missing. Luna: So the availability heuristic is really a symptom of a broader cognitive limitation: we can't process all information, so we rely on shortcuts. Lucas: Yes. And those shortcuts are usually adaptive — they save time and mental energy. But in modern environments with media firehoses and complex risks, they can lead us seriously astray. Luna: I'm thinking about vaccine hesitancy as another example. Some parents see vivid stories about rare side effects and overestimate the risk, while ignoring the massive, well-documented benefits of vaccination. Lucas: That's a perfect example. The anecdote of a child who had a bad reaction is far more memorable than the millions of children who were fine. Availability bias can have real public health consequences. Luna: So what about in business? How do companies exploit this bias? Lucas: Marketing teams absolutely exploit it. When they repeat a claim over and over, it becomes more available — and therefore more believable, even if it's false. That's the illusory truth effect. Luna: And politicians too. They repeat slogans until they feel true. Lucas: Right. So awareness of the bias is step one. But just knowing about it doesn't automatically fix it. You need to build systems — checklists, data reviews, devil's advocate roles — to counteract availability. Luna: One thing I've started doing is keeping a 'reality log' where I write down predictions and revisit them later. It forces me to see when I was overconfident due to availability. Lucas: That's smart. And there's research showing that 'consider the opposite' — actively imagining reasons why your judgment might be wrong — reduces availability bias significantly. Luna: So next time I'm convinced a stock is going to crash because of a scary article, I should force myself to list three reasons it might not. Lucas: Exactly. And then check the actual data. You'll probably find that the crash narrative was way overblown. Luna: Okay, so to wrap up: the availability heuristic is a mental shortcut that makes us think something is more likely if it's easy to recall. It's driven by media, personal experience, and emotion. And it distorts everything from investing to health decisions. Lucas: Right. And the antidote is slow, deliberate thinking. Base rates, counter-arguments, and data rather than anecdotes. It takes effort, but it's worth it. Luna: So next time you catch yourself thinking 'this must be a big risk because I keep hearing about it,' pause and ask: what am I not hearing?