Recency Bias
The tendency to weight recent events more heavily than older ones when forming expectations.
How it is identified
Test: expectations track the most recent period's outcomes rather than the full available history
Unit
qualitative
In depth
Recency bias is why money flows into asset classes and funds after they have performed well, and out after they have performed badly — which is buying high and selling low as a systematic pattern rather than an occasional error. It is the mechanism behind the gap between fund returns and investor returns in the same fund, a difference that studies consistently find runs to one or two percentage points a year. It also causes risk to be underestimated after quiet periods and overestimated after turbulent ones. Looking at long histories rather than recent ones is the obvious countermeasure and the hardest to sustain.
Worked example
A sector fund returns 62% in a year and attracts record inflows the following quarter. Most of the money arrives after the return, which is why the average investor's return in it is far below the fund's own.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Recency Bias” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.