Definition
Recency bias is the tendency to weight recent events more heavily than earlier events when making predictions or decisions. In investing, this means expecting recent market trends to continue indefinitely. After a bull market, investors become overly bullish; after a crash, overly bearish. This bias causes investors to chase performance (buying recent winners) and miss opportunities in out-of-favor assets. Understanding market cycles and maintaining long-term perspective helps counteract recency bias.
Example
After a 10-year bull market, investors expect gains to continue forever and are fully invested in stocks. Following a 30% crash, the same investors panic sell, expecting more declines - often selling near bottoms.
FAQ
What is Recency Bias?
Giving more weight to recent events when predicting the future.
Why is Recency Bias important?
Recency Bias helps investors evaluate behavioral finance and make more informed decisions.