March 2018

  • Mental Bias Can Adversely Affect Your Investment Outcomes

    We’re all a little biased when it comes to what we think and how we behave.  One such bias is the tendency to have a certain opinion and then only look for information that confirms what we already thought.  This is known as “confirmation bias.”  Another type of bias is the tendency to use our recent experience as the standard for what we expect to happen in the future.  This is called “recency bias.”


    We saw this in full effect recently.  From late 2016 until early February 2018, we saw a predominantly upward move in the stock market.  Then in early February 2018, the wheels fell off the machine and the market got slammed down.  Now we are starting to see many people thinking that the trend is now down.

    It may sound harsh to say, but humans generally aren’t emotionally built to properly incorporate and weigh all information gleaned from all of our past experiences.  So we take a mental short-cut and simply focus on the information we’ve collected recently.  In Wall Street language, we tend to overweight the importance of the recent past and underweight the more distant past.  We put a premium on the information we’ve accrued over the last month, for example, and discount information we accrued years ago.  We fail to anticipate “ups and downs,” instead expecting a straight-line continuation of near-term trends for as far as the mind’s eye can see.

    We extrapolate our current experience almost indefinitely into the future.  This cognitive bias, or “mental glitch,” hurts investors in two ways.  We could ask, “why do some investors buy into the stock market just before it crashes?’  Probably because they didn’t expect the market to crash, because they expected the market to go up, because it had been going up, and they expected that trend to continue.  This is the recency bias in action.


    The recency bias lulls investors into thinking that the recent past will extend indefinitely into the future.  If that were true, the only rational decision would be to buy stocks if stocks have recently been trending higher.  In other words, it leads investors to become overconfident when prices have been rising simply because they have been rising.

    The other edge of the sword is the overly pessimistic one.  Do you remember how you felt about the stock market at the end of February 2009, just before it bottomed in March 2009?  Many people thought it would get worse and the carnage would continue.  Most people didn’t want to touch stocks.  So, another not-so-sensitive question would be, “why do investors seem to sell their stocks at the bottom?”  Because they thought prices would fall further, because prices had been falling for all of their recent memory, and they expected more of the same.  Once again, recency bias in action.

    As you can see, recency bias messes with investors’ minds, essentially tricking us into buying after prices run up and selling after prices have fallen.  This is the exact opposite of “buy low and sell high” as we all want to do.  After the wild price swings in February, it’s easy to lose track of the big picture.  Always remember, this too shall pass.  Prices will continue to go up and down, but you can help yourself tremendously by not falling into the recency bias trap and staying the course with whatever your investment plan is.  Thanks for reading.


    Nick Massey is President of Massey Financial Services in Edmond, OK.  Nick can be reached at  Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.

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Massey Financial Services
2601 Kelley Pointe Parkway, Suite 202
Edmond, OK 73013
Phone: 405-341-9929
Fax: 405-341-9979
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