recency bias

Syllable breakdown

Dictionary meaning

the tendency to give disproportionate weight to recent events and experiences when making judgements and predictions about the future, extrapolating recent trends and treating them as more likely to continue than longer historical base rates would justify; in financial markets recency bias causes investors to buy into markets after a period of strong performance — projecting recent gains forward — and to sell after periods of poor performance — extrapolating losses; the result is the well-documented pattern of investors buying high and selling low, achieving returns worse than simple buy-and-hold strategies; recency bias also affects fund manager selection — investors pour money into last year's best-performing funds, which tend to revert toward the mean; after a long bull market, investors underestimate the probability of significant downturns because bear markets feel remote; recency bias is related to the availability heuristic — recent events are more available to memory — but emphasises specifically the temporal dimension of that availability

Examples

• Recency bias led retail investors to pile into technology stocks in early 2000 after several years of extraordinary gains, just before the dot-com crash.
• Survey evidence consistently shows that investor return expectations rise after strong market periods, demonstrating recency bias in forward projections.