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If I let you know, I flipped a coin 5 occasions and on a regular basis I acquired head. What would be the end result on sixth flip? Most of us will say head.
Then I let you know that earlier than this when the coin was flipped 20 occasions, the end result was 50% head and 50% tail. After this data, we might get slightly hesitant in calling out the end result as head on the sixth flip however largely nonetheless go along with the top.
This phenomenon is named recency bias. And it performs a dominant function on the planet of investments.
When the markets maintain rising over the current previous, with out a lot correction, most of us begin believing that it’s going to proceed to rise sooner or later as nicely with out a lot draw back.
The market contributors experience this bias and speak about eye-popping current good points. The media shouts on the prime of its voice to sensationalize this additional. Just a few will current an extended image of the market historical past.
Sadly, each time the market good points, folks improve their stake with the expectation of superlative returns to proceed. And that will increase the general danger within the funding portfolio. Sooner or later, the markets appropriate leading to worth erosion and remorse.
Nonetheless, the nice half is that if we perceive that we’re impacted by the recency bias, we are able to work over it.
To beat this bias, one ought to learn the market historical past of at the least the final 50 years intimately, not simply of India however worldwide extra developed markets. This can assist not simply in safeguarding the hard-earned cash within the downturn but additionally current a terrific alternative to take a position at cheaper costs.
Concluding this put up with a quote from Carl Richards “If you’re not conscious of recency bias, it may well wreak havoc in your life. The one resolution I’ve come throughout is to elongate your definition of the current previous.”
Initially posted on LinkedIn: www.linkedin.com/sumitduseja
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