Recency Bias: Why Last Year's Winners Often Become This Year's Losers

The quiet problem most investors miss

Human memory isn't a neutral recording device. We weight recent experiences far more heavily than older ones. What happened last year feels more important and predictive than what happened five years ago—even when it isn't.

In investing, this recency bias leads people to assume that recent trends will continue. They buy assets that have recently risen and sell assets that have recently fallen, systematically doing the opposite of buying low and selling high.

How this actually works

Recency bias manifests in several ways:

Extrapolating recent returns. After three years of strong stock performance, investors expect continued strength. After three years of weak performance, they expect continued weakness. Both expectations are usually wrong.

Chasing hot funds. The funds with the best recent returns attract the most new money. But top performers typically regress toward average, disappointing the investors who arrived late.

Fleeing cold sectors. Asset classes that underperformed recently feel broken or dangerous. Investors reduce exposure just as these assets may be poised for recovery.

Overreacting to recent news. A market drop last week feels more significant than a similar drop two years ago. Recent events dominate our assessment of risk, even when they're not more informative.

Financial markets often exhibit mean reversion—extreme recent performance tends to moderate over time. Recency bias causes investors to bet on continuation when reversion is more likely.

Where people get this wrong

Believing recent experience is representative. Three years of returns is a tiny sample. It's not enough to distinguish skill from luck or to identify persistent trends.

Assuming continuity where there is none. Markets are forward-looking. By the time you've observed a trend, it may already be priced in—or reversing.

Dismissing base rates. Long-term historical data is more informative than recent data for understanding what's likely to happen. But recent data feels more relevant, so it gets more weight.

Confusing recency with relevance. Sometimes recent information is relevant (a company's new CEO matters). But recent market performance usually isn't more informative than historical patterns.

What to focus on instead

• Extend your time frame. When evaluating any investment, look at 10-20 years of history, not 1-3 years. This provides context and reduces the influence of recent noise.

• Rebalance systematically. Regular rebalancing forces you to sell recent winners and buy recent losers—counteracting recency bias with a mechanical rule.

• Be suspicious of narratives. After strong performance, compelling stories emerge to explain why it will continue. These narratives are usually post-hoc rationalizations, not genuine insight.

• Remember mean reversion. Today's top performer is often tomorrow's laggard. Today's disappointment may be tomorrow's leader. Recent performance tells you where the market has been, not where it's going.

How this connects to long-term outcomes

Recency bias is one of the core drivers of poor investor returns. It causes investors to pile into assets after they've risen (buying high) and flee assets after they've fallen (selling low). This pattern, repeated across market cycles, systematically destroys wealth.

The antidote is humility about what recent performance actually tells you: almost nothing about the future. The past few years are not a reliable guide to the next few years. If anything, extreme recent performance suggests the opposite direction is more likely.

Building wealth requires resisting the gravitational pull of recent experience. It means buying when recent returns make you want to sell, and holding when recent returns make you want to buy more. It's uncomfortable—and it works.