On the first day of my first job as a young investment analyst, the founder of the company introduced himself and spent some time speaking with me about the industry. What I remember most from that meeting: He introduced me to a powerful concept in behavioral finance called Recency Bias.
As its name suggests, Recency Bias is our minds’ tendency to put disproportionate weight on events that have happened most recently. In simple terms, this is why, when the market is going up, it’s hard to imagine a downturn. And when it’s going down, it’s hard to imagine it ever turning positive again. Our minds are very good at simply extrapolating from recent experience.
This is why I think it’s so important to study market history. It can help you maintain perspective when the market is at an extreme.
