When Mumbai witnessed one of its heaviest rainfalls in over a century earlier last week, many residents assumed the next day too would bring floods. When an airplane crashes once in years, passengers avoid flying for months—some even scramble to pay extra for “safer” window seats.
In investing, the same trap appears: investors treat the most recent event, no matter how rare, as if it is the destiny. This is called recency bias -- a subtle yet destructive force in decision-making.
What Is Recency Bias?
Recency bias is the tendency to believe that whatever just happened will keep happening. We overweight the latest event while ignoring long-term patterns. Ironically, it’s often the rare, exceptional events, not the recurring ones, that dominate our judgment.
Everyday Examples of Recency Bias
Take the tragic Air India crash earlier this year. Only one passenger, seated at 11A, survived. Suddenly, 11A seat of the aircraft was seen as the “safest” one, with demand soaring—despite the statistical absurdity.
Or consider August 19, 2025, when Mumbai and nearby districts recorded record-breaking rainfall. Though the skies cleared the next day, many skipped work fearing yet another deluge is on the card.
Both are rare events. Yet they shaped behaviour far more than years of safe flights or thousands of dry monsoons.
Markets: Where Fear Meets Greed
In markets, recency bias shows up daily.
* After a sharp fall, investors fear an endless crash.
* After a rally, they expect stocks to "double every month".
This bias fuels both panic and euphoria, blinding investors to the cyclical reality of markets.
History offers countless reminders: the IT bubble of 2000, the Global Financial Crisis (GFC) of 2008, and the Covid-19 crash of 2020. Each triggered mass panic selling. Each was followed not just by recovery, but by new highs. Those who gave in to recency bias locked in losses at the bottom—missing the wealth created in the recovery.
The Value Destruction Effect
When investors let short-term noise drive decisions, wealth is quietly destroyed:
* Selling quality stocks in fear.
* Overpaying for momentum during euphoria.
* Missing the compounding power of staying invested.
* The problem is rarely of the poor businesses. It is of poor behaviour.
The Value Creation Effect
Investors who resist recency bias gain a powerful edge. They:
* Buy when panic grips the market.
* Hold through temporary volatility.
* Anchor on fundamentals, not headlines.
As the saying goes: “Markets often bottom on bad news.”
For example, when US tariffs were announced in April this year, Nifty hit its low for 2025. It hasn’t broken that level since—reminding us that panic often coincides with opportunity.
Practical Ways to Overcome Recency Bias
* Look at 10-year charts, not 10-day moves.
* Base decisions on fundamentals and valuations, not noise.
* Use a checklist-driven process to avoid impulsive reactions.
* Always separate signal from noise.
Conclusion
Markets will always swing between disaster and euphoria—but neither is permanent. Wealth is built not by reacting to the latest headline but by resisting the belief that the recent past predicts the future.
Recency bias is natural, but it blinds us to the bigger picture. Markets move in cycles, not straight lines. One crash—or one rally—never defines the long term.
In investing, the greatest edge is not access to more information, but the ability to stay rational when others cannot.
Happy Investing.!!!!.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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