On Listening to the Right Things
Reckless blogging and whining

TFS: How Availability Bias can make us act squirrely

Such a big part of being a good entrepreneur and/or being a good marketer is about objectively evaluating risk. Most of the public discourse about availability cascades focuses on the use of public funds, but private funds can be used imprudently as well.  Tq130509ab

The correct management of risk is to recognize both the probability of the outcomes and the magnitude of those outcomes. So a sufficiently bad outcome can overpower a low probability and generate a high risk. Plus, correct risk calculation includes factoring in good outcomes as well as bad outcomes. But if the bad outcome is fresh in your mind, availability bias can cause you to exaggerate its probability, and then to drop the good outcomes from your calculation. So you run scared from a fight you probably would have won. Bad behavior for entrepreneurs and marketers. 

So the next time something frightens you, especially if you want to spend big money insuring against its occurrance, set aside your emotions and become a detective. Am I overlooking possible good outcomes? Human beings usually over-estimate low probabilities. Look at a 1% chance of losing $10,000 versus a 0.1% chance. Your expected loss $100 or $10. Isn't it worth sitting down and figuring if that seat-of-the-pants 1% is really only 0.1%? Of course, risk aversion makes us run from a $10,000 loss as a personal calamity, but that doesn't make it a good business decision. Availability bias says that if a friend of yours just declared a painful bankruptcy, you'll be acting squirrely about risk for awhile. 

Comments