When making financial decisions, investors have to make decisions about the future. Without a time machine, it’s a pretty daunting task.
It’s therefore only natural that some investors, when faced with such a pressure, tend to reach for what’s happened most recently in order to forecast the future. This is Recency Bias in action.
While Recency Bias is helpful in some aspects of our lives, it can be harmful to investors.
For example, if an investor’s portfolio drops by 10%, Recency Bias may convince them that it’s going to just keep dropping. This can lead them to encash investments which are in fact very suitable for their longer term investment objectives.
If you’re a director or senior manager of a financial services provider, you’ll know how frustrating it is when investors self-sabotage like this.
Wi-Ai can’t provide you or your clients with time machines so they can see the future of their investments. However, we can give your clients a framework which allows them to see how behavioural biases like Recency Bias may adversely affect their financial decision-making.
Want to know how we can help your clients achieve profitable decisions? Get in touch at [email protected].