Availability Bias: Why Recent Market Crashes May Feel Bigger Than They Were

Have you noticed how we remember things that happened recently more clearly than things from the past? This is called availability bias. In investing, this means that recent market crashes feel more important than older ones, even if the older ones were more severe.

Let’s understand why this happens.

• Table of contents

• Understanding cognitive bias in the context of market crashes
• How availability bias amplifies the importance of recent market crashes
• The role of media in reinforcing availability bias
• Behavioural finance: How availability bias affects investment decisions
• Case study: A recent market crash and availability bias
• How to overcome availability bias in your investment strategy

Understanding cognitive bias in the context of market crashes

A cognitive bias is when our mind loses its objectivity in a certain regard. In investing, this can lead to wrong decisions. For example, after a recent dip in the market, many investors panic and start selling, because their brain keeps reminding them of the fall, even though long-term market trends have typically shown that a crash is usually followed by a period of recovery and growth.

*Past performance may or may not be sustained in future.

How availability bias amplifies the importance of recent market crashes

Here’s how availability bias tricks investors:

• We remember the most recent crash very clearly.
• We feel the fear from that time again and again.
• We believe that because it happened once, it might happen again.
• We ignore past recoveries and long-term growth.

So, recent crashes feel like they’re bigger and worse than they really are. But in reality, the market goes up and down all the time.

Also Read: What is behavioural biases?

The role of media in reinforcing availability bias

The media plays a big role in making availability bias stronger. When markets fall:

• News headlines become louder and scarier.
• Every drop is shown repeatedly.
• Expert opinions create more confusion.

What the media usually doesn't show is how markets bounce back later.

Behavioural finance: How availability bias affects investment decisions

In behavioural finance, investor actions are studied based on emotions and thinking errors. Availability bias is one of the most common ones. Because of this bias, investors may:

• Sell their investments in fear, locking in losses.
• Stop investing, missing out on future gains.
• Follow recent trends without thinking long-term.

This leads to poor results, even when the market is improving.

Read Also: Behavioral Finance: Meaning, Types, and Its Importance

Case study: A recent market crash and availability bias

Let’s take a simple example. In early 2020, during the COVID-19 pandemic, there was a sharp market crash. Many investors panicked and sold their shares, believing the market would not recover. They forgot past crashes like the 2008 financial crisis.

But, the market bounced back within a few months and even hit new highs later. This shows how availability bias made people fear the recent crash more than having faith in the broader picture or trusting similar historic data and trends.

How to overcome availability bias in your investment strategy

• Focus on facts: Look at long-term performance, not just recent events.
• Stay calm: Don’t act on fear or panic.
• Have a plan: A good investment plan keeps you on track during ups and downs.
• Limit news intake: Don’t follow every market headline.
• Review history: Study past crashes and recoveries; they’re part of the cycle.

Also Read: What is Confirmation Bias?

Conclusion

Availability bias makes recent market crashes feel worse than they are. It can lead to emotional decisions and poor investment choices. But with a little awareness and some planning, you can avoid this trap. It’s normal for markets to fall and rise. Trust your strategy, stay patient, and look at the bigger picture.

FAQs

What is the availability bias in investing?

It’s when investors give too much importance to recent events, like a market crash, and ignore past data or long-term trends.

How does availability bias impact investors during market crashes?

It makes them panic, focus only on short-term losses, and make hasty decisions like selling investments at a loss.

Why do recent market crashes feel more significant than older ones?

Because our brains remember recent events more clearly, the latest crash feels more real and scary than older ones.

How can investors overcome availability bias when making investment decisions?

By focusing on long-term trends, avoiding panic, following a clear plan, and not reacting to every piece of news.

Can media coverage contribute to availability bias in market perception?

Yes, continuous exposure to media coverage can reinforce fear and bias in investors’ minds and may contribute to the perception that things are more dire than they actually are.

At Bajaj Finserv AMC, we recognise that emotions are the cornerstone of investor behaviour – not just for investors but for investment professionals too. That’s why, behavioural finance is at the heart of our investment philosophy, InQuBe, which combines the Information Edge, Quantitative Edge and Behavioural Edge. By understanding, tracking and monitoring market sentiments and our own investment biases, we seek to make mindful and strategic investment decisions. Get the Behavioural edge by investing with Bajaj Finserv AMC. Read more about InQuBe here.