Recency Bias – What Is It And How Can Investors Avoid It?
In a world where information is constant and instant, it’s easy to get sucked into current events. News spreads so fast these days, which if something happens in one part of the world it’s already common knowledge way across the other region of the world. When it comes to investing, these current events could be hazardous, as investors could mistakenly believe that current trends will continue. A prominent example of this could be happening now actually, with the rise of pot stocks, as Canadian companies are seeing tremendous growth in anticipation of October 17th, the retail sale date. For example, powerhouse cannabis companies like Canopy Growth Corp (TSE: WEED) and Aurora Cannabis (TSE: ACB) have seen their share price grow by 375% and 326% in the past twelve months.
Although this type of growth is great for investors that invested early, it might be dangerous for people who invest now with the expectation the stocks will continue to rise. This attitude is a psychological habit called recency bias. Recency bias is when people carry more weight on recent experiences when evaluating the odds of something happening in the future. Another example of this is when a market crash occurs, investors have the tendency to sell based on the expectation that the market will continue to dip.
As long as investors can keep this bias in mind, they should be fine when making investment decisions. It’s essential to evaluate and considerate all information when making a decision. It’s also important to realize that recency bias might be reducing your gains without you even knowing it.