Recency Bias

A scenario where we take decisions based on the recent events, without considering the fundamental aspects & expecting that those events will continue in the future too. 

Examples in Investing: 

1) Looking at the recent very high returns of a particular asset class, say Equities, & believing that it will continue to perform higher in the future too – we want to invest only in Equities now.

2) Similarly, when the recent equity performance is bad, believing that it is the end of stock market & avoiding it completely now.

3) Looking at recent past performance (high returns) of a particular Mutual Fund & we invest our money in that fund now. 

How to Avoid Recency Bias?

1) Avoid FOMO (Fear of Missing Out) & Embrace JOMO (Joy of missing out). FOMO is the off-spring of Recency Bias & results in making wrong decisions, esp. when we see high recent returns.

2) Diversify your investments – don’t get stuck to a particular asset class looking at just recent returns alone. Accept, we cannot predict the future & hence to minimize the risk – diversification across Gold & low-risk debt investments like insurance policies, PPF, etc. are the best weapon for small investors. 

3) Invest according to your financial goals - & NOT to just get high returns. In chasing high return in the short term, we forget our over-all goals, but focus our attention only on the recent performance.