Money Hacks: don’t let Jaws scare you into a bad financial decision
Money Hacks explores behavioural economics concepts and how unconscious biases can influence our financial decisions. Here's how to stay objective and avoid making bad financial decisions.
In the summer of 1975, Stephen Spielberg released Jaws – an iconic film about a seaside town terrorized by a great white shark. It was a box-office hit and an exciting summer distraction for many movie-goers. It also had a powerful, if not totally unexpected, side-effect: it made some people afraid to swim in the ocean.
People knew the story was fictional. And, if pressed, they’d acknowledge that the likelihood of a shark attack didn’t increase during the 2+ hours they were in the theatre. And yet, people who had no problem going into the ocean before were suddenly afraid to do so. What happened?
In the past, when these people were swimming at the beach, they thought about things like the temperature of the water, the heat from the sun and the people swimming nearby. But they probably didn’t spend much time thinking about sharks. After seeing Jaws, they could think of nothing but sharks. The idea of Jaws coming at them from the depths seemed vivid, terrifying and suddenly very likely. In reality, the likelihood of a shark attack was, and continued to be, extremely low. People who stopped swimming in the ocean after seeing Jaws simply fell victim to the availability bias.
What’s the availability bias?
The availability bias is the idea that we make judgments about the likelihood of an event based on how easily we think of an example or instance of that event. In other words, if something comes to mind easily, we think it’s more common or likely.
So, what makes an idea more “available” to us? There are a few things:
- Recency: recent events are more likely to come to mind than events from long ago.
- Emotion: if something triggers an emotional reaction, it’s more likely to be top of mind.
- Proximity: something that happened to us or someone close to us will come to mind more easily than something we only read or heard about.
- Repetition: things we’ve encountered frequently come to mind more quickly than something we’ve only encountered once.
Market drops, lottos, and ads, oh my!
Regardless of our feelings about sharks, it’s important to understand the availability bias because it can have a major impact on our financial decisions. We often think rational, thoughtful reflection guides our decisions. But that’s not always the case.
If you’ve watched your investments shrink during a market crash, you know the emotional turmoil it can cause. In fact, we may even remember where we were when we heard about a recent crash. After a crash, there’s a huge temptation to sell our investments – even though we know this is the worst time to sell. Why? We generally make financial decisions based on what we think will happen next. In this case, the recent, vivid, emotional market crash is very much top-of-mind. This makes further declines seem much more likely. And this may lead us to sell.
This bias can also influence our behaviour following a period of market gains. The news cycle highlights the ever-rising market. We may hear about our friend’s cousin’s co-worker who made a good investment, got rich and retired. The last crash has probably started to fade from our memories. In this case, the rising market is top-of-mind and it feels likely the gains will continue, and it may lead us to jump into the market when it’s near its peak.
When it comes to lotteries, our decision making is strongly influenced by the availability bias. Large jackpots are topics of discussion both before and after the draw, the winners are often profiled in the news, and hearing about the winners triggers happy emotions as we imagine what we’d do if we won the lottery. One thing we never hear about, though, are the millions of people who buy tickets every week and never win.
As a result, when we think about the lottery, winning feels much more likely than it actually is. This can lead us to spend our hard-earned money on a ticket (or 10) even though we have virtually no chance of winning.
One of the main purposes of advertising is to trigger the availability bias. Marketers want their brand to feel familiar, so it comes to mind easily when we’re making buying decisions. When we’re shopping for something – whether it’s a pair of shoes, a cell phone or a new mortgage – we’ll think of the brand we’ve seen more often. And, when a brand comes to mind easily, we’re more likely to give it serious consideration.
When a brand is top of mind, we may confuse familiarity with quality, reliability, or value. Buying a familiar brand without shopping around may save us time, but doesn’t guarantee the best value for our money.
How to overcome the availability bias
The availability bias is prevalent in our decision-making and it can be difficult to overcome. To reduce the impact of this bias in your decision-making, there are a few things you can do:
- Take a breath: since the availability bias can be triggered by emotion, don’t make hasty decisions, particularly when you feel emotional about the decision.
- Do your research: ask yourself why something is top-of-mind and whether it’s a good representation of reality. Dig into the topic so you can base your decision on actual data rather than a single event or anecdote. For example, with a typical national lottery, if you bought a ticket once a week, you might expect to win once every 250,000 years.
- Get advice: the availability bias makes it difficult for you to see things objectively. Get the opinion of an expert or someone without a personal stake in the decision. They’ll help you see things from a different perspective and determine if the idea that’s “top-of-mind” holds up to scrutiny.
When it comes to managing your finances, working with an advisor can help you overcome the availability bias and make better long-term decisions. If you don’t have an advisor and would like one, check out our website to find an advisor near you.