behaviour
Recency bias
The rule
The mind gives the last few years too much weight and forgets the long record. After a long rise, we think gains will last forever.
Where it flips
Recency can fool you the other way too, making you brush off a real, lasting change because "it never used to happen." Where it misleads: you cling to the old normal. The fix: say the long-run record first, then ask what new fact should really change it.
The mind treats whatever just happened as the new normal. It quietly forgets the rest of the story. After a long rise, people think gains will never stop. Right after a crash, they think the market is broken for good. Both are the same mistake: judging the future from a short, recent window instead of the full record.
A worked example
A fund shows three great years, so money pours in. Investors just stretch the recent run forward. They forget that three years is far too short to tell real skill from a lucky market. [illustrative]
How to spot it
- ·saying "this is the new normal" after only a short run
- ·treating a three-year record as proof
- ·no look at how the last full up-and-down cycle went
Amos Tversky & Daniel Kahneman · Behavioural finance research