The availability bias refers to the all too common situation where investors act on information that is fresh and obtained easily. Investors have a strong tendency to focus their attention on a particular fact rather than the overall situation. The behaviorists theorize that this is because particular facts are more “in your face” and thus easily recalled to mind.
The up and down movement of prices is what most finance professionals regard as risk. If you are new to investing and haven’t spent any time watching stock charts in the past, then you will probably be scared to death of investing the first time you do so. Price moves up and down in tiny increments over every minute of the trading day. If we zoom the camera out to look at a quarter or a year, all of those movements within a day are merged into a single dot that tells us whether the stock moved up or down that day.
If we move out to a five-year period, the dots start to represent weeks. When we zoom in on the “price action,” things can look chaotic, or even downright terrifying. When we zoom out and examine the price change over years, the effect is usually calming. We note a progression of undulating dots that tends to move upward, and the trend is very clear.
Not so long ago, volatility wasn’t as easy to assess as watching the VIX change throughout the trading day. Most investors saw quarterly or monthly price changes because that was the timeframe in which they received an account statement in the mail.
Last Updated: 6/25/2018