Don’t Expect the Stock Market to Continue Current Path

Recency effect is the tendency to remember a more recent experience better than a previous experience.

Behavioral economists call this recency effect “availability” and it is programmed into our DNA: I touch a hot stove — ouch!; I learn not to touch a hot stove again. Eventually I use the contained flame to my advantage, to prepare meals for my nourishment. But the result of touching the stove and getting burned is still stored in my memory, inspiring me to use a hot pad and keep my hands well away from the heat.

For investors, recency effect can bias investing decisions based on recent market performance. Whether up or down, we tend to extrapolate the recent event into the future. If the market is going up, we are more likely to act on expectations of a rising market. The converse is also true. Both tendencies can be dangerous.

The Arizona Republic

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