Recency Bias

Recency Bias is a cognitive bias where individuals place greater emphasis on recent events or information, while underestimating the significance of past events or data. This psychological phenomenon is particularly prevalent in decision-making processes, leading to a distorted perception of reality.

Recency bias matters significantly in finance, as it can influence investors' decisions based on short-term market trends rather than long-term performance. For instance, an investor might sell a stock that has performed poorly over the past year, even if it has a history of strong returns, simply because of its recent underperformance. This bias can lead to missed opportunities and suboptimal investment outcomes.