Do investors suffer from behavioral biases? New research demonstrates that they do: They think that a crash is far more likely than it actually is. After you read the newspaper, you might well overreact to bad news about the market -- and lose money as a result.
The best explanation is that investors suffer from what behavioral scientists call the “availability heuristic,” which distorts people’s decisions in many domains. In their pathbreaking work on human behavior, Amos Tversky and Daniel Kahneman found that people make judgments about probability by asking about which events come most readily to mind (and hence are cognitively “available”).