Recency Bias
Recency bias in investing described the cognitive tendency to overweight recent events and extrapolate recent market performance into the future — causing investors to allocate heavily into equities near market peaks after strong recent returns and to flee equities near troughs after recent losses, systematically buying high and selling low.
Recency bias was a specific application of the availability heuristic — the psychological tendency identified by Kahneman and Tversky where people judged the likelihood of events by how easily they could be recalled. Recent events were more cognitively available than distant ones, leading to an implicit overweighting of the recent past in probability assessments.
In investing, recency bias operated through a straightforward mechanism: after a prolonged bull market, recent memory was dominated by positive returns, making further gains feel probable and losses feel remote. This pulled asset allocation toward equities at the worst time from a valuation perspective. Conversely, after a bear market, recent negative return experience dominated memory, making further losses feel probable and recovery distant, pushing allocation away from equities at valuations that historically preceded above-average long-run returns.
AMFI and SEBI investor surveys conducted after the 2020-2021 bull market documented that many new equity MF investors — a majority of whom had entered post-COVID — reported return expectations of 20-30% annually for long-run equity investments, far above the historical Nifty 50 CAGR of approximately 12-14% over 20-year periods. This expectation inflation was a direct expression of recency bias.
The mirror image was visible after bear periods. MF inflow data showed that monthly SIP registration additions and lump-sum equity MF investments declined significantly during 2011-2013 — a period of Nifty 50 sideways movement and macro uncertainty — despite valuations being significantly more attractive than in 2007-2008. Investors who had recently experienced two years of flat or negative returns extrapolated continued underperformance, pulling back capital at a time when historical evidence suggested better forward returns.
Target-date and asset allocation frameworks adopted by larger financial planning practices in India specifically addressed recency bias by removing discretionary allocation decisions — rebalancing rules, fixed equity glide paths, and automatic SIP mandates reduced the scope for recency-driven interference. Research by NISM, SEBI-registered investment advisers, and MF distributors on best-practice financial planning converged on systematic allocation as a structural defence against the high cost of recency-driven market timing.