March 7th, 2013
In the world of investing, what is recency bias? How can you avoid it and why should you care?
In the world of investing, what is recency bias? How can you avoid it and why should you care?
“Recency Bias is where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves.” (http://www.wikinvest.com/wiki/Recency_bias) You can avoid Recency Bias by looking at a chart that shows years and years worth of data for the market you are thinking about investing in. For instance, Finley showed us a chart Monday night of the market he invests in. It showed that, while there are good years and bad years, overall, the market is increasing. Going back to the example I explained on here yesterday, somebody who would be guilty of Recency Bias would have pulled all of their money out of the market when they saw the loss that Finley did in that particular month last year. I should care, because I plan on investing some time in my life (after I have researched enough to where I understand the market I am considering investing in, of course). Another reason I should care is so that I don’t make the same mistake millions (I’m guessing) have made.
Another great answer, Katherine. Recency bias can have some very negative consequences. We MUST focus on long-term historical averages BEFORE making our investing decisions. Well done, Katherine.