Recency Bias

We tend to associate more importance to recent events than we do to less recent ones.

The more vivid our memory of something which occurred in the past is, the more “available” that event will be in our mind and the more probable it will seem to happen again.  But that’s not the right way to assess risk.

An event does not become more likely to recur merely because its last occurrence was recent, memorable, or still on-going—like the current bull market of ’08-’14.  Many people implicitly presume that the market would forever continue its enormous gains, forgetting the fact that bear markets have tended to occasionally happen in the more distant past.

Your perception of history extends back only about ten years.  This leads you to believe that government bonds are safe, that the average recession is as bad as 2008’s, and that we’re in a new normal of high government debts and low interest rates.

Interest Rate Spike

Looks like interest rates have been a bit higher in the past.  Careful with the cause and effect though!

 

Recency bias often “spoils” forecasts by those so-called “stock market experts”. These guys typically rely too heavily on the short-term past to forecast the long-term future. As such their “forecasts” should be more accurately called “postcasts.”

This bias is also related to “The Law of Small Numbers”, the tendency to exaggerate the degree to which a small sample resembles the population from which it is drawn.  By looking only at recent events, you reduce your assessment to a very small sample.

On the other extreme, there are the others with the “long view” who have looked further back and have studied the history of the stock market in minute details just to come up with the conclusion: “But this time it is different.”

In truth, it’s not only different this time, it’s different EVERY time.  History never repeats itself precisely.  Trying to predict the future by extrapolating the past is folly.  Despite this, humans are pattern seeking creatures and like to make forecasts based on patterns they feel they have discovered.

People tend to seek meaning from events, even if they are random.  Humans love to tell stories to themselves and to others about past successes being the result of skill, rather than luck, which only makes the “forecasting folly” problem worse.

Unfortunately, for those hoping for a different outcome favouring their hopes, dreams, or wishes, history is 100% consistent on certain broader matters: bubbles always burst.  And when they do, what people thought was fabulous wealth is proven illusory and it simply vanishes.

So always stay alert and take a quick look back into history now and then.

History happens twice because people don’t listen at the first time and in the rare case when they listen, they tend to forget unpleasant stuff quickly.

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