Recency bias, (also known as availability bias), is when people give increased weight to more recent events, often ignoring information gathered over a longer time period.
Why does it matter?
Recency bias can affect investor decision making, and is often based on emotion rather than an informed decision.
It can manifest in herd like behaviour, when market movements influence investors into thinking rising stocks will continue to rise, leading other investors to follow suit in a fear of missing out.
It can also affect an investors perception of risk, believing recent market events demonstrate a trend, which could leave the investor at risk of market fluctuations.
This may lead to missed investment opportunities, as the investor could be focused on ‘winners’ rather than seeing the bigger picture and building a highly diversified investment portfolio.
Help clients overcome this
Communicating openly with your client and helping them to recognise Recency Bias is the first step.
Asking questions about your clients investment beliefs and understanding their position should help you to:
- Recognise the clients biases, which you can then address and present a range of perspectives.
- Explain the importance of a longer term investment horizon, and defined objectives.
- Show how an evidence based approach informed by historical data can highlight that market fluctuations are to be expected, and knee jerk reactions may not be beneficial in the long run.
- Demonstrate why holding a diversified portfolio can help mitigate risk of market fluctuations.
- Ensure that your clients investment decisions are not based on emotions, and they understand the evidence based approach.
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The information in this document does not constitute advice or a recommendation and is for the information of the recipient only. Past performance is not a reliable indicator of future returns. The value of investments and the income derived from them can go down as well as up and you may not get back the amount invested. PK Wealth Ltd and PK Financial Planning LLP are authorised and regulated by the Financial Conduct Authority.
This content was originally published by EBI. Please visit EBI’s website for more information.