Why Recency Bias is Dangerous to Investors

Why do investors never anticipate bear markets in the middle of a stock market upturn?

Michael M. Pompian 17 November, 2017 | 2:28PM

Bear and bull market

Recency bias occurs when people more prominently recall and emphasise recent events and observations than those in the near or distant past.

Consider the following simple example: a passenger peers off the viewing deck of a cruise ship and spots precisely equal numbers of green boats and blue boats over the duration of her 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 could influence the passenger to recall, following the cruise, that more green than blue boats sailed by.

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About Author

Michael M. Pompian  The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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