December 10, 2013
When it comes to investing, what is recency bias? What can you do about reducing its effects?
When it comes to investing, what is recency bias? What can you do about reducing its effects?
Recency bias is what just happened. You can reduce its effects by training yourself to ignore what just happened. Instead, you should understand historical averages (reversion to the mean).
Well said, Katherine. Let’s recap.
Human beings tend to gravitate to recent events to justify what they have done and what they plan to do. This is a mistake that can be very costly. You must train yourself to overlook this self-defeating approach, especially when it comes to investing.
Focus on historical averages when deciding where to invest and do not get caught up in the latest and greatest thing. This will stop you from jumping in with the crowd and onto the latest bubble (tulip mania, dot.com craze, and housing bubble to name 3). Recency bias can cost you dearly. Avoid it!