Recency Bias Can Hurt Your Portfolio

Have you ever noticed how an equity mutual fund delivering better returns over the last year suddenly gets all the attention even if it lagged behind for a few years before that?

- Kundan Kishore

Data shows that, typically, the best performing funds in the recent past get relatively higher inflows. This type of optimism, which is attached on the basis of a recent event or performance, manifests into recency bias, which can mislead even the smartest of investors.

So, what is recency bias? It is a cognitive bias where people give undue weightage to recent events while ignoring the longer-term trend or historical data. In investing, this means decisions are often based on short-term performance, recent market behaviour, or the latest headlines, rather than sound fundamentals.

How Can Recency Bias Hurt Your Investments?