[MUSIC] We've just described the three stages of a basic investment decision. The first one was to select your investment universe. What asset are you going to consider for your allocation? So what can go wrong? >> Well, here's your problem, when you want to invest in the stock market, there's a lot of information to process and a lot of information to choose from. So how do you do this? So let's reduce the set for you a little bit and give you a few stocks to chose from. Now, tell us if you had to pick two to take a closer look at, which ones would you pick? >> So let's give you a minute to think about this. Based on your selection, we can probably say something about where you're from. You see all these securities have been chosen not completely at random. We've selected pairs oo groups of securities that are from the same geographical area. In this slide, we're highlighting in different colors stocks that were from the same region. So if, for example, you've selected Siemens and BASF, you're probably from Germany. And this is something that people do when they construct their portfolio. This is called home bias. We tend to over invest in securities that we think we have a lot more information about. This is not necessarily true, but we consider that securities that we know from because they are in our country, we somehow have more information about them and we should hold more of them in our portfolio. >> In the same way that we tend to over invest into local stocks, we also tend to over rate recent information. So, if you've just recently heard about a company doing really well, or having trouble. You may over rate that information and ignore everything that happened before. This is what we call recency bias. Ignoring information that's a little bit older and placing too much emphasis on recent information. >> Well, recency and home bias are actually two example of a larger class of biases that we call availability bias. Let me try to explain this concept in a little bit more detail. We face decision that are based on a very large set of information. We are more comfortable in we're focusing our attention on a smaller subset. The question is how do we select the smaller subset. Do we choose it at random, probably not, just as Kirsten pointed out, we look at readily available data. Whether it is recent, this is the recency effect, or whether we think we know a lot more about it, this is the home bias effect, we know more because this is information that we're familiar with. And all of these biases may impact the way you choose the security you're investing in, in a bad way. So one advice that we could properly give to try and avoid this problem is to get out of your comfort zone. Try to get data that is not necessarily easy to access and don't focus your attention on what's readily available. Do some research, extensive research, and try to gather as much information as possible. [MUSIC]