Behavioural Biases (6): Recency
Recency is a great trouble to us, being a particularly tricky sort of behavioural bias that’s rather difficult to overcome. It works thus: you overfocus on the most recent events you’ve experienced and neglect to worry about older information. We don’t so much integrate new information with the old as use it to overwrite our memories.
For investors recency may have a couple of different effects. Positive recency makes you a momentum trader, a sort of living incarnation of a goldfish, forever surprised by the same piece of seaweed. Negative recency makes you a contrarian investor, solidly heading away from anything exciting, looking for where the action isn’t. Either way you’d better be damn sure you know what you’re doing because both approaches more or less guarantee under-diversification.
Recency is a great trouble to us, being a particularly tricky sort of behavioural bias that’s rather difficult to overcome. It works thus: you overfocus on the most recent events you’ve experienced and neglect to worry about older information. We don’t so much integrate new information with the old as use it to overwrite our memories.
For investors recency may have a couple of different effects. Positive recency makes you a momentum trader, a sort of living incarnation of a goldfish, forever surprised by the same piece of seaweed. Negative recency makes you a contrarian investor, solidly heading away from anything exciting, looking for where the action isn’t. Either way you’d better be damn sure you know what you’re doing because both approaches more or less guarantee under-diversification.
