Behavioral Finance
What is Recency Bias?
Recency bias is the tendency to overweight recent events and assume they will continue indefinitely, buying what just went up, selling what just went down, and chasing yesterday's winners.
Formula
N/A, psychological bias documented across all asset classes.
How to Interpret
Recency bias is why retail investors poured into Cathie Wood's ARKK at the 2021 peak, into crypto at every cycle top, and into 'meme stocks' after the rally. It also explains capitulation selling at bear-market lows. The countermeasure is mean-reversion thinking and disciplined rebalancing, sell what's outperformed, add to what's lagged, consistent with your target allocation.
Typical Ranges
N/A, universal bias. Use rules-based rebalancing (annual or threshold-based) to neutralize it.