Emerging Giants Newsletter – December, 2018

It is a widely held belief that electoral outcomes, politics and stock market returns go hand in hand. This belief may just be a case of availability bias. The availability bias along with other heuristics and biases used in judgment under uncertainty have been detailed by Daniel Kahneman in his book “Thinking fast and slow”. The availability bias is a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a complicated decision, rather than undertaking the laborious task of fact checking to arrive at a decision. For instance, when asked the following question – If a random word is taken from an English text, is it more likely that the word starts with a ‘’K’’, or that ‘’K’’ is the third letter? Most people are likely to overestimate the words that start with ‘’K’’. This is only because it is easier to recall words that start with ‘’K’’ as opposed to recalling words that have ‘’K’’ as the third letter. In reality, in any given text there are actually on average two times more words with ‘’K’’ in the third position than words that begin with the letter ‘’K’’.