‘Didn’t I just see that?’ – the frequency illusion bias, and what investors need to learn

Click to read at PeopleScience.com

A friend tells you he only drinks coffee made in a French press.  Then, you see someone order a French press at your favorite coffee shop.  Next, you’re at Target and you see a display with ornate French Press gadgets for sale.  And you conclude: “This French press thing is everywhere!  It’s a big new trend I’d better get in on.” Maybe that’s the perfect Christmas gift for Bob….

But Bob already has one, because he lived in Seattle in the late 90s, when everyone had one.  You haven’t spotted a new trend. You are merely being tricked by your brain through a phenomenon called “frequency illusion” — or, for the nerds,  the “Baader-Meinhof phenomenon.”  Where’s that name come from? Real my whole story at PeopleScience.com. But here’s a taste of it below.

(Linguistics professor) Arnold Zwicky coined the academic term, “frequency illusion.” He says it’s the work of other well-known cognitive biases: selective attention and confirmation bias. As we move through our days, we are exposed to thousands of pieces of information, but we can only focus on a select few.  Most of what we see and hear never really penetrates our consciousness. Our brains have to work this way. Otherwise, we’d live lives of constant distraction.

So when something “new” does break through the noise, we are then primed to notice that new thing. The word or idea or product breaks through over and over, when earlier we would have missed it. Then, noticing that thing also seems to confirm our hunt, prove to us that we are onto something. One day, you decide it’s time for a new car and you want a Subaru Forrester. Almost immediately, you notice how many Subaru Forresters are on the road.

That’s a relatively harmless example, but here’s one that’s far more nefarious. Someone gives you a “hot” stock tip. You then proceed to notice mentions of the company all over the Internet, and maybe even in communication with friends. That *must* mean the stock is a great buy. Better get in now!

Don’t do it! It’s a (cognitive) trap! The road to investment hell lies in such frequency illusions. 

Which brings me to my point for our times. I’ll bet you’ve heard this other places (get it? get it?), but it bears repeating in this context.  The stock market rally is finally showing its age, and it seems we are fully in correcetion territory now. That’s something people like me have predicted for a while. You’ll probably “lose” a lot of money in the next few months, if you haven’t already. I say lose in quotes, because you haven’t lost anything unless you sell.  Stick with tried and true investing principals and don’t panic. If you don’t need your money for 10 years or more, you’ll very likely be fine.  If you needed that money in the next year or two, or even five, then WHY WERE YOU INVESTING IT IN STOCKS?  STOP IT!

Use this moment as yet another lesson. Short-term, and I would argue medium term, the stock market is very fickle and it’s a game you shouldn’t be playing. Long-term, your money is likely fine. So don’t check your portfolio every day. Check every quarter or so to make sure the sensible choices you made last quarter still apply, and to make sure you aren’t too concentrated in one company or industry.  (After a big swing like this, it’s really important to check on your “balance,” which can be impacted by large swings.  Perhaps too much of your retirement portfolio is tied up in company stock, or a mutual fund that’s related to your industry. Change that now.)

A bit more from my PeopleScience story:

Financial advisors often warn investors to avoid a similar phenomenon called “recency bias,” which is a tendency to overweight recent events when making a decision. That’s one reason people panic sell when the market has a bad day, even when the longer trend is positive, or buy a stock which announces a good quarter or new product, even though the firm’s long-term prospects are dismal.

If you find discussion of these mental tricks our mind plays on us — of cognitive biases — I have an entire section of my site devoted to them! 



Don’t miss a post. Sign up for my newsletter

About Bob Sullivan 1638 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

1 Trackback / Pingback

  1. The cognitive bias collection — bobsullivan.net

Leave a Reply

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.