Stock Market · Mind over Markets

Availability heuristic

The availability heuristic is the brain's tendency to judge probability based on how easily examples come to mind. Vivid, recent, or emotionally charged events feel more likely than they actually are.

Classic examples

After a plane crash gets media coverage, people overestimate flight risk and underestimate car risk, even though driving is statistically far more dangerous.

Same mechanism applies to investing.

Availability in investing

1. After 2020 COVID crash, retail investors avoided equity for years. Afraid of another sudden crash that statistically rarely happens.

2. After Adani-Hindenburg episode 2023, investors avoided all infrastructure/conglomerate stocks. Extrapolating one company's issues to an entire sector.

3. After Yes Bank failure 2020, retail panicked about all private banks, even though HDFC Bank, ICICI Bank, etc. were structurally different.

Reverse availability, euphoria

When recent examples are spectacular wins, the brain extrapolates them too:

1. After Wipro went up 1000x in the 1990s, every IT stock was 'the next Wipro'.

2. After Tata Motors rallied 5x in 2021-2023, investors expected similar in every auto stock.

3. After bitcoin 100x'd, hundreds of cryptocurrencies promised similar returns, most went to zero.

> Available examples bias judgments in both directions. Recent vivid wins make us greedy. Recent vivid losses make us fearful. Neither is a reliable forecast.

Indian media amplifies availability

Financial TV channels report on extreme moves. CNBC TV-18 doesn't run banners for 'Asian Paints had a normal day'. They run them for 'Adani stocks crash 30%' or 'IRCTC doubles in 6 months'.

Your information diet creates the available examples that distort your probability estimates.

Defeating availability bias

1. Use BASE RATES instead of memorable examples:

• 'How often do small caps crash 30%?' (historical base rate)
• Instead of: 'Remember 2018 small cap crash?' (vivid example)

2. Read historical market data, not just recent events:

• Indian markets have 7-10 major corrections per decade
• Sector rotations affect every sector eventually
• Most stocks underperform indices over long periods

3. Look at unspectacular successes:

• HDFC Bank delivered 18% CAGR over 25 years without any single 'spike' that made headlines
• These boring compounders are statistically more common than the 100x stories

4. Reduce financial news consumption:

• Daily news triggers availability bias
• Weekly or monthly summaries are sufficient for long-term investors

The pilot's mindset

Commercial pilots resist availability bias by using checklists and statistical safety procedures rather than 'feel'. They know one vivid memory of turbulence doesn't change the actual probability of safe flight. Investors benefit from the same discipline.

Takeaway. Availability heuristic: vivid recent events feel more likely than they are. Recent crashes make us too fearful; recent rallies make us too greedy. Defeat with historical base rates, reduced news consumption, and remembering boring compounders that don't make headlines.