Recency bias is a psychological phenomenon where a person can remember something which has happened to them recently compared to the thing that has happened to them a while back.
For example, to conduct a test to check this phenomenon, a person is asked to recall the name of the thirty people that they have met. Well, out of the thirty people, the person will easily tend to remember the names of the people that they have met recently compared to the ones that they have reached a long time back.
Recency bias is the main type of cognitive error that happens to the human brain. It is one of the errors which plagues a lot of traders and investors. It tends the human mind to remember the recent data that are happening in their lives and forget the ones that have happened a long while. With the help of this article, you will understand what causes this problem and how well you can overcome the problem of recency bias in your life if it is affecting you on the financial scale as well.
Why it is your enemy as an investor?
Recency bias is the description which tends to extrapolate the recent experiences that will happen to you in the future. When it comes to investing, recency bias is one of the biggest disasters that they can face. Because when investors try to invest, the recency bias skews the entire reality in front of them, and this is how their views can change from choosing something to selecting another thing.
For example, let’s say that an investor has been making a good average annual return in the last 5 years. However, in the last twelve months, his portfolio is not giving good returns. Here, because of recency bias, he might feel negative and may believe that the market and his strategies are not working in his favor anymore. However, this is not the complete reality.
Similarly, for a trader, let say that out of seven days, he made losses in the first four. Nonetheless, in the last three days, he made consecutive wins. Here, he may feel positive as he might be carrying more weight to his recent trades over the past ones because of the recency bias.
Moreover, many times, investors may tend to stay away from shares thinking that the stock market will fall because it has been falling recently. That is not the case which happens every time as the share market is not always the same. You can never put your trust in it based on recent behaviors.
How to overcome the recency bias?
If the recency bias is becoming a day to day problem then there are proven ways to overcome it. Here are some of them presented below.
— Don’t ever have a myopic view.
Get a grasp on the long term source and try to invest in the market that way. A myopic view means that you are constricting yourself to the four walls of the market, and you don’t want to try something new. You might fall when you are trying to invest somewhere, and there are gut-wrenching actions that might happen as well. But since recency bias helps you to build your views based on the latest outcomes, try to overcome it by thinking about the bigger picture in your life. Just try to expand your opinions as much as you can.
— Always try to work in with what you have in control.
Control all the asset allocation that you have. Try to stay away from the bad investments in your life. Setting realistic expectations is something that can put you down and bring false hopes in your life. Always try to remember the fact that recency bias feeds on the belief that you have in your life. Try to minimize the risks that you have built on your front. Use the thesis and help of the finance operators for your investment business if you have one. They will try to cut them down for you.
— Don’t ever try to get swayed with the latest performance.
As a smart investor, you should not ever try to get swayed with the latest performance or the numbers that are popping up in your life. You always have to understand that something in your life is just a temporary digit. Just like the numbers that you are making in the market to the points that you have scored, not always they will stay the same. So raising your expectation based on the higher numbers is a silly movie, and here is where recency bias plays a part in your life.
Recency bias is a brain illusion
Always try to understand that cyclicality comes with a lot of terrains. There is not a smooth road that you can take to success. If you are trying to get the best thing in your life then there are a lot of ups and downs that you have to face. But you should never determine the outcome or the results based on recency bias.
Recency bias is a brain illusion that happens when you see the latest issues. It is your very brain tricking you into thinking that the same will happen for a couple of other days, as well. Find appropriate assistance if you are finding it hard to let go. There is always assistance if you are trying to look for one.