Recently, many Americans were surprised when Silicon Valley Bank failed and a “run on the bank” occurred. This was unexpected as regulations had been put in place after the Great Depression and additional regulations were added after the 2008 recession, making banking a stable component of the economy for over a decade.
A particular phenomenon, called recency bias, comes to mind. It can trick us into believing that what happened in the recent past will continue to happen. This bias can be particularly dangerous for investors in today’s around-the-clock media environment where we receive a large amount of new information, with 90% of the world’s data estimated to have been created in the last two years.
Recency bias can lead us to believe that interest rates will always be low, as this has been the case for much of the last 23 years. However, a broader look at history shows that financial conditions are cyclical, and high-interest rates can occur. For example, Americans in 1964 had known low-interest rates for over a decade, and most probably felt like high-interest rates were a thing of the past. However, the next year rates began to rise, peaking at over 19% in 1980.
Recency bias can also feed trends in the news and lead investors to invest in holdings that are doing well and cash out of investments that are doing poorly. However, trends sooner or later reverse, making this approach unsustainable. To combat recency bias, it is important to have a long-term investment plan, pay attention to history, and assess motivations before making investment decisions. It can also be helpful to maintain a dialogue with a professional financial advisor who takes a data-driven and analytical approach grounded in academic research, focusing on long-term investment strategies. The key is to tune out market noise and stay the prudent course, allowing wealth to grow over time.
In conclusion, while recency bias can lead us to believe that what happened in the recent past will continue to happen, it is important to pay attention to history and have a long-term investment plan. Investors should assess their motivations before making investment decisions, and seek the guidance of a professional financial advisor who takes a data-driven and analytical approach focused on long-term investment strategies. By tuning out market noise and staying the prudent course, wealth can grow over time.
Bottom Line
Have you lost on investments made based on short-term trends? Or have you managed to acknowledge a cognitive bias and prevent it from affecting your decisions? We’d love to hear from you. Please feel free to leave a comment or reach out to me via Twitter or Facebook. At LexION Capital, our priority is to make our clients’ financial goals a reality by providing hands-on wealth management solutions, backed up by science-based insights into the financial industry. We help you maintain well-diversified investment plans. Should you need help in the aspect of financial growth, please visit my company’s website, LexION Capital.
Elle Kaplan is the founder and CEO of LexION Capital, a fiduciary wealth management firm in New York City serving everyone who feels left out by traditional “Wall Street”, including women and the families they love.
