Recency Bias

The Story

In March 2020, UK markets plunged. The FTSE 100 fell from over 7,400 to below 5,200 in just a few weeks. Priya, a teacher in Birmingham, watched her SIPP lose thousands in value. Panicking, she switched her entire pension into cash. "The market is collapsing," she told herself. "It's only going to get worse."

By the end of 2020, the FTSE 100 had recovered to over 6,400. By early 2022, it had surpassed its pre-pandemic high. Priya, sitting in cash, had missed the recovery entirely. She'd let the most recent weeks of data override decades of evidence that markets recover from downturns.

What Is Recency Bias?

Recency bias is our tendency to overweight recent events when making predictions about the future. Whatever happened last feels more important, more relevant, and more likely to continue than it actually is. It's a mental shortcut — and in finance, it's an expensive one.

Psychologists Tversky and Kahneman (1973) identified this as part of the "availability heuristic" — we judge probability by how easily examples come to mind, and recent events are always the most vivid.

Recency Bias in Finance

Recency bias drives the classic investor mistake: buying high and selling low. When markets have been rising, recent experience tells us they'll keep rising — so we pile in near the top. When markets crash, recent experience screams danger — so we sell near the bottom.

Dalbar's annual studies of investor behaviour consistently show that average investors earn significantly less than the funds they invest in, largely because they chase recent performance. In the UK, the Investment Association regularly reports that the best-selling funds in any given year are those that performed best in the previous year — and these rarely repeat their success.

The UK housing market provides another vivid example. After years of rising prices, people assume property "always goes up." But between 2007 and 2009, UK house prices fell by roughly 20%. Those who bought at the peak based on recent trends spent years in negative equity.

"Past performance is not a guide to future results" appears on every UK financial product — and is almost universally ignored. De Bondt and Thaler (1985) demonstrated that stocks which performed well over three to five years tend to underperform subsequently, and vice versa, suggesting markets systematically overreact to recent trends.

How to Protect Yourself

Zoom out. When you feel anxious or euphoric about your investments, look at a 30-year chart of the stock market. Every crash and every boom looks like a blip in the long view. The UK stock market has delivered roughly 5% real returns annually over the past century — through wars, recessions, and pandemics.

Ignore short-term performance. When choosing funds, look at 10-year or longer track records, not last year's returns. Better yet, choose low-cost index funds where past performance matters less because you're buying the whole market.

Set a check-in schedule. Review your portfolio quarterly or annually — not daily. Frequent checking amplifies recency bias because you're constantly exposed to the latest movements.

Pre-commit to staying invested. Tell yourself — and ideally write down — that you will not sell during a market downturn. If your pension or ISA drops 30%, your plan should already account for that possibility.

Remember base rates. The UK stock market has delivered positive returns in roughly 75% of calendar years since 1900. A bad month or even a bad year is the norm, not the exception.

Reflection Questions

• When did you last make a financial decision based primarily on what happened in the previous few weeks or months?
• If your investments dropped 30% tomorrow, would you sell, hold, or buy more? Be honest.
• Do you check your portfolio too frequently, and does that affect your decisions?

Research Note

Key references: Tversky, A. and Kahneman, D. (1973) "Availability: A Heuristic for Judging Frequency and Probability," Cognitive Psychology, 5(2), pp. 207-232. De Bondt, W.F.M. and Thaler, R.H. (1985) "Does the Stock Market Overreact?" The Journal of Finance, 40(3), pp. 793-805. Barclays Equity Gilt Study for long-term UK market return data.