Recency Bias

In December 2021, the average investor was overwhelmingly bullish. The S&P 500 had just delivered its third consecutive year of double-digit returns. Tech stocks seemed unstoppable. Surveys showed consumer confidence in the stock market at its highest level in 20 years. Twelve months later, the S&P was down 19%, the Nasdaq was down 33%, and those same investors were deeply pessimistic — many had sold near the bottom. They weren't analyzing the future. They were extrapolating the recent past. This is recency bias: the tendency to weigh recent events far more heavily than older ones when making decisions about the future.

How Recency Bias Works

Your brain is a pattern-recognition machine that gives disproportionate weight to recent data. If the last three winters were mild, you assume next winter will be mild too — even if the 100-year average says otherwise. In investing, if stocks went up for the last five years, your brain assumes they'll keep going up. If they crashed last month, your brain assumes more crashes are coming.

This happens because recent memories are more vivid and emotionally charged than older ones. Your memory of the 2022 bear market is sharp — you remember checking your portfolio, feeling the anxiety, maybe losing sleep. Your memory of the 2008 recovery, where the market tripled over the next decade, is abstract and faded. The vivid recent memory wins every time.

Recency bias is especially damaging because it inverts the correct behavior. After a long bull run, when stocks are most expensive and future returns are statistically lower, recency bias makes you most confident. After a crash, when stocks are cheapest and future returns are statistically highest, recency bias makes you most afraid. You end up buying high and selling low — the exact opposite of what creates wealth.

Fund flow data confirms this year after year. Investors pour money into stock funds after strong performance periods and pull money out after weak ones. Morningstar has documented that the average investor in their highest-rated funds still underperforms the fund itself because of poorly timed entries and exits driven by recency bias.

Why It Matters for Investors

Recency bias affects every investment decision you make. It determines your asset allocation (too much in whatever performed well recently), your risk tolerance (falsely high after gains, falsely low after losses), and your expectations (assuming recent trends will continue indefinitely).

The cost is real. J.P. Morgan's research shows that an investor who missed the 10 best days in the S&P 500 between 2003 and 2023 earned 4.8% annually instead of 9.8%. Most of those best days occurred right after the worst days — exactly when recency bias told investors to stay out. The investors who acted on recency bias and sat in cash after crashes missed the snapback rallies that drove the majority of long-term returns.

Real Example

Energy stocks tell a perfect recency bias story. From 2015 through 2020, energy was the worst-performing sector in the S&P 500. Oil prices collapsed, companies cut dividends, and the sector lost money for six straight years. Recency bias told everyone energy was dead — the world was going electric, oil was finished. Investors abandoned the sector entirely. Energy's weighting in the S&P 500 fell to just 2%, down from 13% a decade earlier. Then in 2021 and 2022, energy was the best-performing sector by a mile, returning over 80% in two years while the rest of the market struggled. The investors who fled energy because of recent poor performance missed one of the biggest sector rallies in decades. The few contrarians who bought when recency bias had everyone else selling earned extraordinary returns.