It is a cognitive bias that favors recent events over historic ones.

A memory
bias, recency bias gives "greater importance to the most recent event"

It is the tendency of investors to focus on recent trends and events, and

unjustly assume they are more likely to happen in the future.
An investor has been
making a good
average annual return
in the last 5 years.
However, in the last
twelve months, his
portfolio is not giving
good returns.
❑ Recency bias can cause investors to extrapolate patterns and make
projections based on historical data samples that are too small to ensure
accuracy.
Causing investors to enter asset classes at the wrong times and end up
experiencing losses.

❑ Recency bias can cause investors to ignore fundamental value and focus
only on recent upward price performance.

Making investors risk principal loss when investments revert to their mean
or long-term averages.
❑ Recency bias can cause investors to utter the words that many market
veterans consider the most deceptive of all: "It's different this time."

❑ Recency bias can cause investors to ignore proper asset allocation.

Causing investors to become infatuated with a given asset class that,

for example, appears in vogue.
▪ Sample size and extrapolating trends. Advisors should educate and
present data regarding their client's investments.

▪ Price versus value. Advisors need to demonstrate that out-of-favor,

undervalued asset classes can make for very wise investments.

▪ "It's different this time." Use the "advisory piggy bank" approach; and
point historical evidence until the client understands that it won't be
different this time.

▪ Unbalanced portfolio. Advisors need to educate their clients that proper

allocation and diversification are crucial to long-term investment
success.
 Before making any major decisions, surrounding yourself with
the right information and resources is critical even though this can be
hard to do during volatility. When the market is dropping, our minds
find it difficult to look past what is happening immediately. Hence,
the first step in correcting any behavioral bias is awareness. From
there, it is important to manage information flow, by looking at more
data when analyzing performance, keeping the bigger picture in
mind and nothing cyclical nature of relative outperformance. It would
also be prudent to deepen the decision-making process
approaching investment with analysis.