Fear of another stock crash: Availability Bias

There is no doubt that some investors still fear the stock crash of 2008. This is even more common when there are so many discussions about the market being overpriced today. Some advisors are once again suggesting that investors should invest in "safer" businesses.

Much of this fear of a stock crash has more to do with availability bias than anything else. Availability bias is a bias that causes people to overestimate the probability of events that are memorable. Memorable events are further magnified by coverage in the media; therefore, the bias is compounded.

Two prominent examples would be estimations of how likely plane accidents are to occur and how often children are abducted. Both events are quite rare, but the vast majority of people believe that they are more common and worry about them. In reality, people are much more likely to die from an auto accident than a plane accident, and children are more likely to die in an accident than get abducted. The majority of people think the reverse is true. This is because the less likely events are more "available" or more memorable. Looking at the literature or even just the interactions of daily life will reveal thousands of examples of availability bias in action.

So is your fear of another stock crash more to do with availability bias than fact? Are you acting irrationally because of fear that can sometimes be common in the media?stock crash photo

Prudent monitoring of your investments is important. With the strategy that I explain on this site and in my book, The Confident Investor, I teach you to get out of the market before the stock crash is so bad that it destroys your portfolio.  In fact, I specifically do investment trade analysis with the time frame of 2008, just so you know that the system should prevent the worst of dire consequences that occurred during that stock crash (see here, here, and here).

You can purchase my book wherever books are sold such as AmazonBarnes and Noble, and Books A Million. It is available in e-book formats for NookKindle, and iPad.

Photo by zemistor

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