Definition
Recency Bias
Recency bias is the tendency to give too much weight to recent events and to assume the latest trend will continue, while ignoring longer history.
After a strong bull run, recency bias convinces investors that high returns are normal, so they pour money into equities or a hot sector at the peak; after a crash, the same bias makes them swear off stocks just before a recovery. Chasing 'top performing' funds of the last year — which then mean-revert — is a textbook example.
Recency bias also distorts expectations: a few years of double-digit returns get extrapolated into retirement plans, leading to under-saving. The cure is to study long-term, full-cycle data, stick to a fixed asset allocation rebalanced periodically, and treat recent extremes as likely to fade rather than persist.
Related terms
- Anchoring BiasAnchoring bias is the tendency to lean too heavily on the first piece of information you see — the 'anchor' — when making a financial decision, even when that number is irrelevant.
- Herd MentalityHerd mentality is the tendency to copy the financial decisions of a crowd — buying what everyone is buying and selling when everyone panics — instead of relying on independent analysis.
- Availability HeuristicThe availability heuristic is the mental shortcut of judging how likely something is by how easily examples come to mind, rather than by actual probability.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.