How to fix the problems with recency bias

How to fix the problems with recency bias

June 01, 2023

As humans, one peculiar thing we tend to do is extrapolate recent past events indefinitely into the future.

With the constant news cycle, this behavior has become even more prevalent. What used to constitute the "recent past" a few years ago, now seems to extend to just a few minutes ago.

When things are going poorly, we tend to assume they will continue on that trajectory indefinitely. For example, if your portfolio value has been falling, it's tempting to think, "If this keeps up, I'll be broke in [insert number of months]."

On the other hand, when things are going well, we expect them to remain that way forever. If you've received a bonus every year for the past five years, and you plan on buying a new house in October, it's tempting to factor that bonus into your decision. However, it's disappointing if the bonus doesn't materialize.

This psychological phenomenon is known as Recency Bias, and it can have devastating effects on our lives if we're not aware of it.

The solution is to broaden our definition of the recent past. By learning from history, we can avoid repeating the same mistakes. It's important to have a memory that extends beyond the short-term, so we can recall times when things didn't go as planned. This way, we're more likely to make informed decisions and avoid the same traps in our finances and all other aspects of our lives.

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and Flagship Financial Advisors are separate entities. This content is developed from sources believed to be providing accurate information and provided by Flagship Financial Advisors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice.