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Recency Bias

beginner6 min read

We assume the recent past will continue — buying tops and selling bottoms on autopilot.

Recency biasOverweighting recent events when forecasting. is the brain’s tendency to over-weight recent events and assume they’ll continue indefinitely. Whatever just happened feels like the new permanent reality — and in markets, this putsThe right to sell the underlying at a set price — a bearish bet. you on autopilot to buy tops and sell bottoms.

Recency biasOverweighting recent events when forecasting. is dangerous because it’s strongest exactly at the extremes, where it does the most damage. After a long bull run, recent memory is all gains, so you extrapolate “stocks always go up,” pile in with maximum confidence (and often leverageControlling a large position with a small amount of money.) — right at the top, just before the reversal. After a brutal crash, recent memory is all pain, so you conclude “the market is broken, it’ll keep falling,” and sell or stay out — right at the bottom, just before the recovery. In both cases, the recent past feels like an unbreakable trendThe prevailing direction of price: up, down or sideways., and you act on it most aggressively precisely when it’s about to reverse. This is the engine behind performance-chasing (pouring into last year’s hot fund/sector) and panic-selling. The defences: zoom out to long-term history (which shows cycles, not straight lines), remember that extremes don’t last and markets are cyclical, and lean on rules and a fixed plan (SIPs, rebalancingRestoring your target asset mix by trimming winners, topping up laggards.) that mechanically do the opposite of the recency impulse — buying more when prices are low, trimming when high. Don’t mistake the recent weather for the climate.
  • What it is — over-weighting recent events and assuming they continue forever.
  • The damage — extrapolating bull runs → buy the top; extrapolating crashes → sell the bottom.
  • It drives — performance-chasing (last year’s hot fund/sector) and panic-selling.
  • The defence — zoom out to long-term cycles; remember extremes don’t last; use rules (SIP, rebalancingRestoring your target asset mix by trimming winners, topping up laggards.) that counter the impulse.
ExampleAfter two years of a roaring bull marketSustained rising (bull) or falling (bear) market phases., a friend who “never invests” finally goes all-in, convinced gains are guaranteed — just before a correction. Conversely, after a 30% crash, seasoned-sounding voices declare the market “finished” and sell — just before a strong recovery. Both extrapolated the recent trendThe prevailing direction of price: up, down or sideways. at the worst moment. A boring SIP that kept buying through both did far better.
Key takeawayRecency biasOverweighting recent events when forecasting. over-weights recent events and assumes they’ll continue — strongest at the extremes, so it makes you buy tops (after bull runs) and sell bottoms (after crashes). It drives performance-chasing and panic-selling. Defend by zooming out to long-term cycles and using rules (SIPs, rebalancingRestoring your target asset mix by trimming winners, topping up laggards.) that counter the impulse.
FAQs
Isn’t following recent trends the same as momentum investing?

No — disciplined momentum is *systematic and risk-managed* (ranked rules, defined exits, diversification), whereas recency bias is *emotional extrapolation* that peaks at extremes and ignores risk. Recency bias makes you chase last year’s winner with your whole portfolio at the top; momentum strategies have rules to exit and size. The danger is emotional, rule-less extrapolation — not measured trend-following.