Guarding Against Recency Bias

In last week’s issue, we touched upon “recency bias” and how this cognitive phenomenon can provoke irrational trading behaviour in investors. Because of recency bias, investors can be susceptible to what is known as “headline risk,” putting more weight on new information regardless of whether it is valuable or effectively just noise. Enterprising Investor recently published an article acknowledging that memory contamination is a real risk for individuals, along with tips for how investors can protect themselves from tabloid journalism. While it is impossible to fully guard against memory contamination, it appears that the best way to combat it is to remain curious and seek out the facts before paying attention to “clickbait-esque” headlines.

For readers interested in delving deeper into how our memories can fail us, Kathryn Schulz does an excellent job in her book Being Wrong: Adventures in the Margin of Error, in which she outlines how memories mold to support our beliefs and biases, rather than providing an unbiased viewpoint.