Recency Bias

Recency bias is the psychological tendency to place disproportionate weight on recent events when forming expectations about the future. In investing, this manifests as the belief that whatever has happened recently will continue — bull markets feel permanent during their peaks, and bear markets feel endless at their troughs. This bias is one of the most destructive forces in investor psychology because it systematically leads to buying high (after recent gains create euphoria) and selling low (after recent losses create despair).

The mechanism is rooted in how human memory works. Recent, vivid experiences are more emotionally accessible than distant, abstract data. An investor who has watched their portfolio rise 30% over the past year feels viscerally that stocks "always go up," even though they intellectually know about past crashes. Conversely, during a 40% drawdown, the pain is so immediate and intense that historical recovery data feels irrelevant. Recency bias explains why fund inflows peak near market tops and outflows spike near market bottoms — investors consistently act on recent experience rather than long-term evidence.

Combating recency bias requires systematic approaches that override emotional reactions. Maintaining a written investment policy statement that specifies target allocations regardless of market conditions forces discipline. Dollar-cost averaging removes the timing decision entirely. Studying market history — including events before your investing lifetime — provides perspective that counteracts the bias. The simple exercise of asking "Am I making this decision because of what happened in the last 3 months, or because of my 20-year plan?" can expose recency bias in real-time and prevent costly mistakes.