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The cognitive tendency to place disproportionate weight on recent events when making decisions, assuming current trends will continue indefinitely.
Recency bias causes investors to chase recent performance, buying high after a rally and selling low after a decline. After a 3-year bull market, investors become overly optimistic and increase their stock allocation. After a crash, they become overly pessimistic and flee to cash, missing the recovery. This pattern is well-documented: fund flows consistently show that investors pour money into winning funds and withdraw from losing funds, arriving after the performance has already occurred. Studies by Dalbar show that the average equity fund investor has underperformed the S&P 500 by roughly 3-4% annually over decades, largely due to behavioral biases like recency.