Availability Bias

 

The availability bias is one of the most frequently overlooked and misunderstood cognitive biases that plagues investors. When investors fall prone to the availability bias, they overweight the most easily accessed and digested information.

For example, a few months ago my uncle messaged me about a stock idea after reading a financial periodical. His reasons for buying a stock that week? The stock was below its tangible book value, its earnings for this year are growing, and the industry has favorable conditions for this year. The periodicals reasons in order? Price below tangible book value, growing earnings, favorable tailwinds.

When investors are prone to availability bias, they overly rely on widely known information for capital allocation decisions. In an extremely competitive market, investors have little to no edge if they rely on headline news and simple equity analysis.

For example, many value investors know that Brighthouse Financial (BHF) is trading at half its tangible book value. It’s a sizable spinoff from MetLife. Pretty much everyone knows about its Shield Annuities they advertise excessively – and sound like financial witchcraft. On the surface, it certainly looks like an investment candidate.

However, if the analysis stopped there, due to availability bias, investors are likely to overlook an important financial modeling assumptions BHF uses. BHF assumes 4.25% 10-year US Treasury yields over the next decade. Seeing as the 10-year US Treasury is currently sitting at 2.92%, 4.25% seems unlikely. With a careful eye to where we are in the credit cycle, it’s more likely 10 years from now the Treasury could be lower than where it is today than around 6 or 7% to average out to BHF’s 4.25% assumption. With flawed Treasury yield assumptions, a stock selling at half its tangible book doesn’t look like such a prudent investment.

By looking beyond headline news and digging into a company’s annual reports and conference calls, value investors can arm themselves with a deeper understanding of a company’s true inner workings. This is the beginning of the real edge accumulating information to make sound investments.

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