Behavioral Finance and Your Portfolio

15Information Processing Bias #7: Recency Bias

The present is never our goal; the past and present are our means, the future alone is our goal.

—Blaise Pascal (1623–1662), French mathematician and philosopher

Bias Description

Bias Name: Recency Bias

Bias Type: Cognitive

Subtype: Information processing

General Description

Recency bias is a cognitive predisposition that causes people to more prominently recall and emphasize recent events and observations than those that occurred in the near or distant past. Suppose, for example, that a cruise passenger peering off the observation deck of a ship spots precisely equal numbers of green boats and blue boats over the duration of the trip. However, if the green boats pass by more frequently toward the end of the cruise, with the passing of blue boats dispersed evenly or concentrated toward the beginning, then recency bias would influence the passenger to recall, following the cruise, that more green than blue boats sailed by.

Example of Recency Bias

One of the most obvious and most pernicious manifestations of recency bias among investors pertains to their misuse of investment performance records for mutual funds and other types of funds. Investors track managers who produce temporary outsized returns during a one-, two-, or three-year period and then make investment decisions based only on such recent experiences. These investors do not pay heed to the cyclical nature of asset class returns, and so, for them, funds that have ...