Behaviour
Recency is why last month feels like the future
Recent experience dominates expectation, which is why investors are most optimistic after rises and most cautious after falls.
What follows is the working version of recency bias: the decisions in the order you actually meet them, with the reasoning attached.
Before you start
- Expectations of future returns tend to track recent past returns.
- This produces optimism at high prices and caution at low ones.
- Longer histories are a partial correction because they are less vivid.
Recent data is overweighted
What happened lately is easier to recall and feels more relevant, so it carries more weight in forming expectations than its informational value justifies. Surveys of investor expectations have generally found them rising after periods of strong returns and falling after weak ones.
That pattern is the opposite of what a valuation-based view would suggest, which is part of why it is interesting. It operates on professionals as well as individuals, though the professional version is better dressed.
It sets your reference point
A few good years quietly become the baseline for what normal looks like, and anything less feels like underperformance. A few bad years do the same in reverse, making ordinary returns feel like a windfall. The reference point moves without you deciding to move it, which is what makes it hard to notice.
Writing down what you expected five years ago, and comparing, is the simplest available check.
Why it is expensive
Optimism peaks after prices have risen, which is when people increase risk, and pessimism peaks after they have fallen, which is when people reduce it. That sequence describes buying more of what has become more expensive and less of what has become cheaper. It is the same mechanism behind performance chasing, operating on allocation rather than on fund selection.
The behaviour feels prudent in both directions, which is what makes it durable.
The long view is a correction
Looking at returns over many decades, including several severe declines, gives a more representative picture than the last three years. It will not feel as real, because vividness comes from experience rather than from tables. That is precisely why writing the long-run range into your plan matters: the plan is more representative than your memory.
The purpose is calibration of expectations, not prediction of a path.
Recency in reverse
Investors who lived through a severe crash often remain cautious for a very long time afterwards, which is recency operating on a longer timescale. Studies have generally found that people who experienced poor markets early in life take less risk subsequently. That is a rational-looking response to a personal sample of one, which is not a large sample.
On an ordinary week, neither the optimistic nor the cautious version is evidence about the future.
None of this is a substitute for talking to a clinician if something feels wrong.
Practical defences
Fixed allocations with scheduled rebalancing force you to trim what has risen and add to what has fallen, which is recency reversed. Regular contributions do the same automatically without requiring any judgement. Reading your own written expectations before making a change is the cheapest available check.
None of this predicts markets; it prevents your expectations from being written by the last twelve months.
The takeaway
Your expectation of the future is mostly a description of the recent past. Check its date.
The version you keep doing is the version that works.
Questions readers ask
Should I expect returns like the last decade?
No decade is a reliable guide to the next one, and using recent returns as an expectation is exactly the bias described here. A wide range of outcomes is the honest expectation.
Does a long bull market mean a crash is due?
Not in any usable sense. That is the same error with the sign reversed, and the timing of declines has not proved predictable.
