Personal Finance Essentials
Small Sample Size Bias
The Psychology of Investing > Small Sample Size Bias
You’re suffering from this bias when you reach a conclusion based on a very small amount of data, failing to realize that you’re looking at random or anecdotal evidence that isn’t representative of the whole picture.
“I met two rude people in New York – New Yorkers are rude.” “My neighbor was laid off. This economy is terrible.” “My fund has gone up for two years – this fund is great!” All of these are conclusions drawn from data sets too small to be meaningful.
Consider a real example: during a difficult economic period, one investor was convinced the entire country was suffering. But at that same moment, 92 out of every 100 working-age Americans still had their jobs, and fewer than 8% of homeowners were underwater on their mortgages. His sample – his personal experience and the people he knew – was not representative of the actual data. Acting on small-sample conclusions can lead to investment decisions that are completely disconnected from reality.