Personal Finance Essentials
Recency Bias
The Psychology of Investing > Recency Bias
This is when you assign greater importance to recent events while undervaluing or ignoring more extensive – albeit older – information, even when the older information is more important or accurate.
In other words, you think that what is happening right now will keep happening.
If stock prices are rising, you think they’ll keep rising. If the market is falling, you think it will continue to fall. This causes people to buy high and sell low – the exact opposite of what they intend to do. Recency bias is one of the primary forces behind the behavior that causes the average investor to earn far less than the average market return.
The next time you’re tempted to compare your investment results to a recent period – a month, a quarter, even a year – ask yourself whether that comparison serves any useful purpose for a financial goal that may be decades away. It usually doesn’t. Stick with your long-term strategy.