AAC is not talking about air conditioning. I’m talking about what I think are some of the biggest collective biases that pose problems when we invest in almost anything.
AAC stands for availability, attention, and confirmation biases. They are interchangeable and separate; they can work together and against each other, so keep that in mind.
These three biases are the most common when it comes to money, investing, and even expenses. Spending often gets caught up in these three, so let me explain them.
Attention bias is self-explanatory. It involves getting caught up on something and making a decision based on that, losing the ability to see the bigger picture. For instance, the media might highlight a market trend or an impressive investment, drawing your attention to that single spot rather than the whole context.
Confirmation bias is something we encounter daily, especially with social media. If you have a belief and want it confirmed, it’s easy to find support online. However, this means your investment thesis or use of money may get stuck within a bubble of similar views, preventing you from knowing when to exit or change your strategy.
Availability bias involves making decisions based on the information readily available to us, which is often incomplete. Despite the notion of perfect information in economics, we never have access to every piece of information. This bias was evident in the 2021 GameStop scenario, where people made decisions based on limited and skewed information, resulting in unexpected market movements.
So, how do you get around these biases?
It’s not as simple as doing the opposite. You need to understand the pros and cons of each bias. Confirm your view but also seek out opposing views to justify or counter your perspective. Expand your attention beyond the immediate focus, taking a few extra steps to gather more information. Developing a habit of looking at other sources and widening your perspective can help mitigate the effects of these biases over time.
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