Lesson 4 of 7 · 15 min
Information-processing biases: anchoring, mental accounting, framing and availability
Information-processing biases are about how data are handled rather than which beliefs are defended: people anchor on a starting number, split money into mental buckets, react to how a choice is worded, and judge by whatever comes to mind most easily.
In short
- Anchoring and adjustment: starting from an initial number and adjusting too little. Fix: ask whether a view is based on a past figure (purchase price, last year's EPS) or on expected future conditions.
- Mental accounting: treating money differently depending on which mental 'account' it sits in, although money is fungible. Leads to ignoring correlations, chasing income and taking more risk with 'house money'. Fix: put all assets on one sheet and plan the whole portfolio.
- Framing: answering the same question differently depending on how it is presented. A gain frame makes people more risk-averse; a loss frame makes them more risk-seeking. Narrow framing loses the big picture.
- Fix framing by stripping out references to gains and losses already made and focusing neutrally on future prospects.
- Availability: judging probability or importance by how easily examples come to mind. Four sources: retrievability, categorisation, narrow range of experience, resonance.
- Fix availability with an investment policy, careful research and long-run historical data.
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