The Availability Cascade and It’s Implication on Investing

I’m in the process of rereading Thinking, Fast and Slow, this time in a more deliberate, note-taking fashion. The paragraph below really struck me on several levels. The obvious being in politics, fracking, climate-change, and more. But it also is very applicable in the markets, especially with the  shorter-term trading books. How quickly one person can ask a pointed question to the right person that gets repeated and re-asked and eventually stated as fact. Heard of many a hedgie use this to their advantage to enter/exit a position at a slightly better price. Just call a sell-sider and ask “Hey have you heard anything about xx.” They’ll make calls off it…guaranteed.

But even in the multi-month periods, fears can arise from seemingly nowhere, get into a feedback loop and push a stock for longer than you might think before it reverses course or normalizes with the rest of its peers.

“An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action. On some occasions, a media story about a risk catches the attention of a segment of the public, which becomes aroused and worried. This emotional reaction becomes a story in itself, prompting additional coverage in the media, which in turn produces greater concern and involvement. The cycle is sometimes sped along deliberately by “availability entrepreneurs,” individuals or organizations who work to ensure a continuous flow of worrying news. The danger is increasingly exaggerated as the media compete for attention-grabbing headlines. Scientists and others who try to dampen the increasing fear and revulsion attract little attention, most of it hostile: anyone who claims that the danger is overstated is suspected of association with a “heinous cover-up.” The issue becomes politically important because it is on everyone’s mind, and the response of the political system is guided by the intensity of public sentiment. The availability cascade has now reset priorities. Other risks, and other ways that resources could be applied for the public good, all have faded into the background.”

And with the rise of “social media,” the snowball/feedback loop gets going so much faster than it used to. Like Churchill said, “A lie gets halfway around the world before the truth has a chance to get its pants on.” Today I think it might be changed to before the truth gets out of bed.


About jaggybeans

Wall Street guy in Texas. Spent some time on the buy-side, more time on the sell-side and some corporate IR and finance work. Between gigs currently but looking buy-side. Avid reader. Always looking to improve. Fully aware that my shit stinks and so does yours.
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