Recency Bias in Investing Explained in 59 Seconds
Recency bias is another one that rears its ugly head. Often it describes the tendency to pay attention to and give more weight to outcomes that occurred in the recent past, when in many cases, they shouldn't be considered any more important than those that happened in the distant past. Researchers found that the global financial crisis of 2008 fueled increased trading, and that trading resulted in worse performance outcomes for those traders. These investors, who have seen crashes in bear markets, sold their investments in a panic because they believed the market would continue dropping completely, missing out on the rebound due to this irrational fear. On the flip side, investors in a raging bull market may succumb to overconfidence, believing that the trend will continue and take on more risk than is appropriate for them. Falling victim to recency bias is usually a great way to buy high and sell low. Also, keep in mind that if your investing horizon is 30 plus years, what happens in the next year or two should be of little concern. Again, take a broader view on the total market, focus on the long term, and ignore the short term fluctuations and trends.
#investing #behavioralfinance #biases
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