Recency Effect: Why You Should See The Big Picture!

3 thg 1

I was off work one day, and my wife was busy with her job. I took care of our home, did chores and even took the kids out to eat. In the evening my wife came home and I decided to sit down to play some video games.

Seeing this, she asked, "Were you playing video games all day?" I was surprised. That woman, how could she? I was doing housework and taking care of the kids all day! Trust me woman, this is more tiring than your work in the office.

Yes, believe me, babysitting and doing housework is exhausting. It's a full-time job in itself and it's often undervalued. Every parent knows that looking after children requires constant attention and energy.

Not to mention the additional chores around the house. It's not just about keeping the kids safe and entertained. It's about managing multiple tasks simultaneously, which can be physically and mentally draining.

In those moments of gaming, I was actually unwinding from the day's stresses. It's important for parents to have some downtime.

But my wife assumes that if I'm playing games, it means I've been doing that the entire day!

This my friend, is a classic example of recency effect.

Recency effect is like remembering the end of a movie and forgetting the whole story that makes up the movie. This cognitive shortcut often leads to misconception in relationships.

This does not make sense, right? I mean, just because the last thing my wife saw was me playing video games, she assumed that's what I had been doing all day.

Bennet Murdock’s 1962 study provides empirical support for this.
thedecisionlab.com/biases/recency-effect
In his experiment, participants were asked to recall words from a list. He found out that people tend to remember the first few words (the primary effect) and the last few words (recency effect).

The words in the middle were likely forgotten. This implies that our memory is skewed towards recent information.

Murdock plotted his experiment result on a graph where it showed a clear position curve. Memory performance was high for the initial words, dip in the middle and peaked again in the last few words.

This obviously stated that the memory gives more spotlight on the recent events.
I think it’s because the brain works like a camera, capturing snapshots of our experiences. The most recent snapshots are still on the surface, easy to view and access.

They’re fresh and vivid, like a photo just taken. Over time as more snapshots are added, the earlier ones get buried under the pile and become less accessible.

Relation to investing
In stock investing, the recency effect is like looking only at the last chapter of a book while ignoring the rest. Investors, swayed by recent events, may believe that a short-term trend, good or bad, will continue. This bias can lead to mistakes.

Imagine a stock doing well recently. An investor might think this good streak will go on and make optimistic choices. But this is like judging a book by its last page. The full story, including long-term trends and historical data, matters more.

Also, reacting quickly to recent market news can be impulsive, like making a judgment based on the latest chapter without reading the whole book. This often goes against the idea of long-term investing.

Lastly, if an investor has recently seen gains, they might downplay the risks, forgetting the market's ups and downs. Just as in the story where a person was judged for playing video games, without seeing the day's full work, investors might misjudge a stock based on recent performance, not the whole picture.

In essence, the recency effect in investing is about focusing too narrowly on the latest events, a habit that can cloud judgment and lead to poor investment decisions.