The Relation Between Recency Bias and Investing

Mar 15, 2023 | BDE, Investing, Investing

In 2023, many Americans were caught off guard when Silicon Valley Bank failed and a “run on the bank” occurred, despite the fact that regulations had been implemented to ensure stability in the banking system after the Great Depression and the 2008 recession. This unexpected event highlights the phenomenon of recency bias, which can lead people to believe that what has happened in the recent past will continue to happen in the future. Recency bias can be particularly problematic for investors in today’s world, where there is a constant influx of information and data, with an estimated 90% of the world’s data created in the last two years.

One common manifestation of recency bias is the belief that interest rates will always be low, which has been the case for much of the past 23 years. However, looking back further into history shows that financial conditions are cyclical, and high-interest rates can occur. For instance, Americans in the 1960s had experienced low-interest rates for over a decade and may have believed that high-interest rates were a thing of the past. Nevertheless, interest rates began to rise the following year and peaked at over 19% in 1980.

Recency bias can also lead investors to follow trends in the news, which can be problematic as trends inevitably reverse over time. This approach is not sustainable and can lead to poor investment decisions. To overcome recency bias, it is crucial to have a long-term investment plan, pay attention to history, and assess motivations before making investment decisions. Seeking the guidance of a professional financial advisor who takes a data-driven and analytical approach focused on long-term investment strategies can also be beneficial. By focusing on the big picture and tuning out market noise, investors can make prudent investment decisions that will result in long-term wealth creation.

In summary, the unexpected failure of Silicon Valley Bank in 2023 highlights the importance of being aware of recency bias and its potential to lead to poor investment decisions. While it is easy to be influenced by recent events, it is crucial to take a broader perspective and consider historical trends. Investors should develop a long-term investment plan, assess their motivations, and seek the guidance of a professional financial advisor who can provide a data-driven and analytical approach focused on long-term investment strategies. By staying the course and avoiding market noise, investors can create sustainable wealth over time.


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