Behavioural Economics: Explaining the Availability Bias

In this episode of tutor2u’s A-Level Economics Mastery Series, Geoff Riley unpacks the fascinating concept of Availability Bias and its critical role in Behavioural Economics. Learn how our judgments and decisions are influenced by recent, vivid, or emotionally charged events and explore real-world examples of this bias in action.

From overestimating air travel risks after a plane crash to panic-selling during market downturns, this video provides relatable examples that bring economic theory to life. Discover why availability bias matters for exam success and how it shapes everything from policy design to consumer behaviour.

1. Definition of Availability Bias

• Availability Bias: A cognitive shortcut where decisions are influenced by immediate, recent, or vivid examples that come to mind easily. It leads to flawed judgments because ease of recall does not accurately reflect real-world probabilities or importance.

2. Causes of Availability Bias

• Recency Effect: Recent events are more memorable and disproportionately affect decisions.
• Vividness and Emotional Impact: Dramatic or emotionally charged events are easier to recall and therefore influence perception more strongly.
• Media Amplification: Extensive coverage of specific events (e.g., disasters) exaggerates their perceived frequency and importance.

3. Examples of Availability Bias

• Travel Safety: After seeing news of a plane crash, people may overestimate the dangers of flying, despite its statistical safety compared to driving.
• Business Risks: A leader might over-prioritize risks like a recent cyber-attack while ignoring broader, less immediate threats like supply chain issues.
• Investor Behavior: Investors may overreact to recent market volatility, leading to panic-selling or overly cautious investment decisions.
• Health Priorities: Fear of rare but dramatic diseases (e.g., Ebola) can overshadow attention to more common but less-publicized health risks (e.g., heart disease).

4. Importance in Behavioral Economics

• Market Behavior: Shapes consumer spending and investment decisions. For instance, people might overspend on "urgent" items during a crisis even if they're unnecessary.
• Policy Design: Policymakers use availability bias to influence behavior, such as leveraging vivid examples in public health campaigns (e.g., graphic anti-smoking warnings).
• Consumer Decisions: Bias explains deviations from rational behavior and helps predict responses to economic stimuli.

5. Relevance to Economics

Availability bias highlights the intersection of psychology and economic decision-making. It is crucial for understanding:

• Behavioral deviations from rational models.
• Real-world applications in markets, policymaking, and consumer behavior.
• Examining how biases shape economic outcomes and human choices.