Don't Let Your Brain Wreck Your Portfolio. How to Overcome Bias in Investing

In early 2021, the financial world watched as GameStop––a struggling video game retailer––saw its stock price surge from under $20 to over $500 per share. This was not driven by a sudden improvement in the company's business fundamentals, but by a coordinated buying frenzy among retail investors, largely organised on social media platforms like Reddit. The narrative was a compelling story of a populist uprising against Wall Street hedge funds who had bet on the company's failure.

Vivid, emotionally charged posts of massive gains went viral, creating a powerful feedback loop where the idea of getting rich quickly felt immediate and certain. The risk of catastrophic loss, by contrast, became abstract and easy to ignore. This event, which cost institutional investors billions, was a dramatic illustration of a powerful cognitive bias: it ultimately erased immense value for many retail investors––the availability heuristic.

I. The Core Idea

The Problem of Thinking Fast

This mental shortcut causes us to judge the likelihood of an event based on how easily examples come to mind, often leading to costly financial mistakes.

The core principle for overcoming the availability heuristic is the intentional practice of cognitive debiasing. This is not about eliminating mental shortcuts, but about building a systematic framework that forces a shift from fast, intuitive, and often flawed thinking to a more deliberate, analytical, and rational mode of decision-making (🔗Thinking Fast & Slow).

Debiasing is the act of consciously implementing rules and processes that introduce beneficial friction into your investment choices. It ensures that decisions are grounded in objective data and long-term strategy rather than being hijacked by the most recent, emotionally charged, or easily recalled information. We have to do that to overcome our bias in investing.

II. The Everyday Analogy

Consider a seasoned airline pilot preparing for a transatlantic flight. Despite having thousands of hours of experience and having completed the same route countless times, she does not rely on her memory or intuition to confirm the aircraft is ready for takeoff.

Her recent memory is full of examples of perfectly smooth flights, making the possibility of a mechanical failure feel remote and less available. Instead, she methodically works through a detailed, written pre-flight checklist. This checklist is a debiasing tool. It forces her to systematically verify every critical system––from flight controls to fuel levels––regardless of her feelings or recent experiences. It replaces a potentially flawed mental shortcut with a rigorous, data-driven process.

For an investor, a debiasing framework functions as this pre-flight checklist, ensuring that a portfolio is not launched based on intuition alone, but on a systematic evaluation of all critical variables.

III. The Practical Toolkit

Overcome Investing Bias

Implementing a debiasing framework requires a set of concrete, actionable strategies that create a buffer between a cognitive impulse and a financial decision. These tools are designed to automate discipline and force a more objective analysis.

I have listed a few ideas below but before going through that, why don't you see how debiased you are?

Creating a Pre-Investment Checklist. 

Before making any new investment, force yourself to answer a standard set of questions in writing.

• Valuation: Based on metrics like price-to-free cash flow (P/FCF) ratios, is this asset cheap or expensive relative to its history and its competitors?

• Business Fundamentals: What is the company's long-term competitive advantage? What are the primary risks to its business model?

• Contrarian View: What is the strongest argument against making this investment?

Automating Key Decisions

The most effective way to remove emotion is to make important decisions automatic.

• Commit to investing a fixed amount of money at regular intervals (e.g., monthly) into your core holdings, regardless of market news or performance. This systematic approach prevents the availability-driven temptation to buy high during a frenzy or sell low during a panic.

• Set target allocations for your assets and schedule a periodic review (e.g., annually) to sell assets that do not match your requirements anymore.

Actively Seeking Disconfirming Evidence. 

Your brain naturally seeks information that confirms your existing beliefs. To counteract this, make it a rule to actively search for and read well-reasoned arguments that contradict your investment thesis. For every article you read supporting a stock purchase, find one that outlines the bear case.

Keeping Track of Decisions

Document every investment decision you make. For each buy or sell, write down the date, your rationale, and your emotional state. Reviewing this journal periodically will reveal your personal patterns of bias. You might discover you are most likely to buy a stock after seeing it featured on a news program, allowing you to recognise and correct that trigger in the future.

Use a Bias-Checker

An objective third party can be an invaluable defence against cognitive biases. A good financial advisor's role is not to predict the market, but to act as a behavioural coach who ensures you adhere to your long-term plan, questioning decisions that seem driven by recent hype or fear.

IV. The Deeper Dive

The availability heuristic is a mental shortcut our brains use to assess the likelihood of an event based on the ease with which examples come to mind. This cognitive mechanism was first identified by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Their research showed that when faced with a complex question of probability, we unconsciously substitute it with a simpler one: "How easily can I think of an example?".

In one classic experiment, participants were asked whether there are more English words that start with the letter 'K' or more words that have 'K' as the third letter. The vast majority guessed the former. In reality, there are about three times as many words with 'K' as the third letter. The error occurs because our minds find it much easier to retrieve words by their first letter.

We mistake the ease of retrieval for a higher frequency in the world.

This heuristic becomes particularly distorting when the ease of recall is influenced by factors other than actual frequency.

The heuristic's impact is not limited to finance. In medicine, a physician who has recently treated a rare disease may be more likely to consider that diagnosis for the next patient with similar symptoms––a bias that can lead to misdiagnosis.

In society, repeated media portrayals associating a demographic group with certain behaviours can reinforce harmful stereotypes, as those associations become the most easily recalled examples.

V. The Advanced Context

The availability heuristic does not operate in isolation; it interacts with other cognitive biases to create powerful, self-reinforcing loops. For example, it is closely linked to our tendency to favour information that confirms our existing beliefs (🔗 Confirmation Bias). Information that aligns with our views is often easier to recall and feels more fluent, making it more "available" and further strengthening our original conviction.

In financial markets, this dynamic fuels herd mentality. When a simple, compelling narrative, like the GameStop short squeeze, becomes highly available through media and social amplification, it creates a shared reality. Investors join the herd because the dominant idea is the most easily accessible one, often creating FOMO.

However, it is crucial to understand the limitations of debiasing strategies.

1. Constant analytical thinking is mentally exhausting. The goal is not to eliminate intuition but to apply deliberate analysis to consequential decisions, particularly in finance.

2. A debiasing system is only as good as its design. A poorly constructed checklist can create a false sense of security. The tools are meant to aid rational judgment, not replace it.

3. In moments of extreme market panic or euphoria, powerful emotions can override even the most disciplined systems. Debiasing improves the odds of rational decision-making, but it does not grant immunity from human nature.

The ultimate defence is a combination of robust systems and the self-awareness to recognise when emotions are threatening to take control.

Sources, Further Reading & Disclaimer

🔗 Judgment under Uncertainty: Heuristics and Biases (Science, 1974)

🔗Availability: A Heuristic for Judging Frequency and Probability (Cognitive Psychology, 1973)

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