Recency bias is giving the latest events more weight than they deserve. It grows out of the availability heuristic, described by Amos Tversky and Daniel Kahneman in 1973: people judge how likely something is by how easily examples come to mind, and recent, vivid ones come most easily. After a crash another one feels close; after a long rise, rising feels normal.
In markets it shows up as extrapolation. Robin Greenwood and Andrei Shleifer studied surveys of investors' expectations from 1963 to 2011 and found people expected the highest returns after prices had already risen most — just when standard models expected returns to be lowest. The counterweight is the base rate: how often something has happened over a long record, not over the last few months. In the app, a holding's Price Chart goes back up to five years and the Portfolio Value chart has an All range, so a longer window is one click away.
Ease of recall isn't evidence. The base rate is how often it has actually happened.
SOURCES
- Tversky, A. & Kahneman, D. (1973). Availability: a heuristic for judging frequency and probability. Cognitive Psychology, 5(2), 207–232.
- Greenwood, R. & Shleifer, A. (2014). Expectations of returns and expected returns. Review of Financial Studies, 27(3), 714–746.
Educational content only. It is not personal financial advice.