Fighting Recency Bias

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"Recency bias" is giving undue weight to the most recent information. In financial planning, it often stems from headlines reporting the most recent volatility in the market and, by implication, investment returns. Recency bias is one of over 50 different types of cognitive biases listed in Wikipedia, which are defined as "…systematic patterns of deviation from norm and/or rationality in judgment."

Unfortunately, regardless of the evidence, recency bias can never be eliminated for several reasons. It is instinctual. When we were all living in caves thousands of years ago, we needed to be aware of our immediate surroundings for survival (avoiding sabretooth tigers, searching for food, etc.). Driving a car today is similar – drivers must be aware of what is going on immediately around them.

A more obvious reason is the headline or "breaking" news item that constantly bombards us about the Dow Jones or S&P 500. The inference is that the most recent news must be the most relevant.

For personal financial planning, it is not.