What Connects 9/11, Brains, & Trading? Why’s It Important? 1
Do you remember what you were doing, or where you were when you first heard that planes had crashed into the World Trade Center on September 11 2001?
If you are old enough, chances are you can. This is because the event was so unexpected and momentous that it sticks in our minds, and is easily available to us.
How is this important to traders?
11. Availability Bias
The 9/11 example is an instance of our availability bias; that is our natural tendency to easily retrieve information that for some reason or other looms large in our memories.
Obviously, events that change the world we live in (like 9/11) or affect our lives in a significant way (like your wedding day) are examples of this.
Other instances include information that you come across, or is repeated to you multiple times.
This could be in the form of news headlines repeated incessantly on TV, information that is read over and over again (like memorizing stuff for an exam), or even state sponsored propaganda.
Regardless of the method by which information becomes more available to us, the result is the same – they influence our behavior.
How?
Immediately after 9/11, a good portion of Americans polled said that they were less willing to fly.
Even though the probability of dying in a terrorist attack involving a plane, in the immediate aftermath of one just occurring, is extremely low, people still thought of flying as extremely risky.
The images of the twin towers in flames and collapsing were just too vivid in their minds, and worked to bias their decision making.
Traders are exposed to dramatic events too. Just ask any trader what they were doing or where they were when markets melted down during 2008, or March 2020.
More importantly, ask them how trading through such extremes of volatility affected their perception of risk in the future.
It is quite likely that those who lost a lot of money as markets crashed will tell you that they now pay more attention to risk management, especially pertaining to rare events.
Some may even tell you that the experience colored their perspective to the point where they now overestimate the probability of market crashes.
In other words, the experience converted them into perma-bears who now believe that the next market crash is lurking around every corner.
Since rare events are by definition, rare, the overestimation of their probability is the human availability bias at work.
Furthermore, with the advent of 24 hour financial news, headlines get repeated ad nauseum, which only serves to reinforce their availability in our cognitive processes.
A good example of this was in 2021, when news outlets constantly reported on stock markets making new highs; to the point where the majority of folks, even those with barely any experience, could only talk about stocks going higher.
Their belief is not based on any kind of analysis or experience in the markets, but on the fact that they keep hearing the same thing over and over again – that stocks keep moving higher.
Is it any wonder then, that when they think of putting on a trade, their availability bias kicks in, reinforced by the bandwagon effect, and tells them to go long?
To be continued…
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