Recency Bias: How do current trends impact investment decisions?

After the dramatic market declines in March, many investors expected markets would continue to fall. While the massive amount of uncertainty surely influenced this sentiment, it also reflected in the natural inclination to weigh recent events more heavily. This inclination is called “recency bias”, and simply put, it means that humans favor current events over historic ones when thinking about what may lie ahead. Recency bias is the reason the rapid market recovery after March lows took many investors by surprise. It also suggests that following this most recent period of strong performance, many investors may well expect the equity market to continue to grind higher and reach new highs.