When we learn a new word, expression, brand, song or phenomenon, we are suddenly led to notice this element more in our environment, even though it is neither more frequent nor more present.

This illusion results from an amalgam of two other cognitive biases:

  • The selective attention bias, which refers to the way our brain unconsciously sorts information according to our interest.
  • Confirmation bias, which consists in our brains favoring or ignoring certain information according to our prejudices.

Although it may seem harmless, the Baader-Meinhof phenomenon can prove dangerous in investment: it can easily lead us to erroneous conclusions, as in the perception of inflation, for example: our brain will notice sharp price rises, while diverting our attention from stagnation or falls.

In finance, it can mislead us into making bad decisions, leading us to overestimate risks or overvalue trends. When an investor becomes aware of a new concept, such as currency risk, liquidity risk, or a new valuation ratio, after having been exposed to it in particular, he runs the risk of guarding against it more than he should, or of letting this bias influence his investment methods. Similarly, when discovering a new company or a new trend, it's easy to fall prey to the frequency illusion.

In technical analysis, the discovery or application of a new chart pattern can lead to it being perceived repeatedly and exaggeratedly, again influencing decisions. In any case, according to our in-house expert Xavier Delmas, chart analysis is largely a matter of subjective interpretation.

The phenomenon of frequency illusion is regularly observed, according to our expert, among financial professionals. Significant gains or losses can have a lasting influence on future perceptions, particularly for those who have undergone traumatic or life-changing experiences during crises such as the subprime or real estate crises.

Knowledge and awareness of financial biases is the first step in protecting yourself against them. To counter them effectively, it is also useful to rely on figures, statistics and facts: refer to company analyses and results, find out about market trends, growth vectors, information about a company's expansion into new segments, markets, products or geographical areas. The investor can listen to his intuitions, but it is essential to confront them with factual, quantified elements to verify their veracity and avoid any error.