Normalcy Bias – Ostrich style – sticking head in the sand


Normalcy Bias – Ostrich style – sticking head in the sand

The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

http://en.wikipedia.org/wiki/Normalcy_bias

Watch a short video on YouTube here on Normalcy Bias – http://www.youtube.com/watch?v=1hdf675sUAc

As humans when we are faced with some abnormal things, we tend to console ourselves as all is well and everything is okay. It comes from not recognizing what you’re dealing with. It is because it has not happened before it does not mean it will not happen. This leads to procrastination in making quicker decisions.
We simply refuse to see the evidence that is in front of us, because it is unlike anything we have seen before
Something like an ostrich sticking its head in the sand in the event of a danger.
We humans are programmed to act quickly in the event of a quick incident (like an accident), but, not during a slower and constant negativity that comes in (like a climatic disaster – global warming).
This is like the frog when thrown into a boiling water will jump out immediately and escape from the danger (like an accident), but, when you throw the frog in a water with room temperature and slowly boil it (global warming), it will not realise the slow approaching danger, but, will enjoy the warmth, until it realises the intensity of the heat, but, then it will be too late.

Normalcy Bias examples

  1. Jews in Germany were aware of what was happening to their friends and neighbours, but, they felt it will all be over soon and return back to normal
  2. Ignoring the warning signs on the highways, warning announcements about hailstorm during a long drive
  3. Working in a company where layoffs are happening, but, being optimistic about the job security
  4. Smoking for years knowing it is injurious to health, just assuming you are a physically fit person
  5. Economies going down under, but, hearing only the positive news spread by the analysts and assuming things will be back to normal
  6. Driving for years gives us a feel that accidents can never happen

Overcoming Normalcy Bias

  1. Read the facts and objectively analyse them
  2. Don’t hide from the facts – face them and plan
  3. Trust your instincts more – read your gut feel
  4. Be over-prepared than under-prepared
  5. Reach out to others for expert advice
  6. Do not procrastinate.

My experience with Normalcy Bias

During 2008 when the Indian stock markets started collapsing down, I was reading lots of reports on what is happening globally and was convinced that ‘housing markets in US how it can impact Indian stock markets’, this is just a big noise created by analysts, this is just a temporary dip, but, soon everything will be normal.
I even went ahead and started buying some good companies.
I was also under the impression that since I was holding a lot strong businesses, I was sure something happening somewhere will not impact those Indian businesses.
But, what happened was a total chaos – even the best fundamentally strong businesses’ stock prices were pulled down.
I had to clean up my portfolio – before I could incur lot more losses, and rebuilt the portfolio again, which I did.
Even though I was reading all the news, I was wilfully ignoring what was happening.

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Filed under Behavioural Finance

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