The Garrulous Jay – Recency Bias

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On Saturday I returned from a fabulous week away with family and friends on the West Coast of Scotland. On a different note yesterday saw the announcement of this year’s A level results. But what links these seemingly unconnected events?

Whilst much of the UK has been battling with extreme heat, drought warnings and hosepipe bans, Scotland’s west coast has been experiencing above average rainfall this year, and it didn’t take us long to understand how this might be the case. On several days the cloud dropped to less than 100m, from which level it coated us in relentless drizzle as we were out walking below.

But this was more than compensated for by the final day when we went sea-kayaking. We found ourselves paddling around the skerries off Arisaig in glorious sunshine, stopping on pristine tidal beaches to swim and eat lunch. The silence was only broken by the cry of seabirds, and we were forever under the watchful gaze of seals, nonchalantly basking on the rocks around us.

I am sure my memories of a great holiday have been enhanced by the fact that the weather on our final day made it so special.

Moving on to this week’s A level results, much has been written about the drop in top grades as Ofqual exerted pressure on exam boards to lower numbers following two years in which results were inflated by measures put in place to tackle the impact of Coronavirus.

As a result 36.4% of exams were graded at A* or A, compared to 44.8% in 2021 when teacher assessed grades were used for the second year running, and 82.1% of results were at grade C or above compared to 88.2% last year. (Source: BBC News & Ofqual)

This was part of an approach which is expected to see a further fall next year as grades revert to their pre-Covid levels. The likely focus on the sequential decline in results, may give rise to the erroneous conclusion this has in turn led to students not securing places at their first choice universities.

What links my holiday experience and this week’s A level results is the effect of recency bias. This is “a cognitive bias that favours recent events over historic ones”. (Source: Wikipedia)

Recency bias can also be seen to be at play in investment decision-making, with potentially highly damaging consequences. In fact, recency bias plays a central role in accentuating both bull and bear markets…

As markets rise investors are tempted to increase their investment exposure, effectively taking on more risk in the expectation that further gains will be made. Conversely, a falling market may induce panic-selling even as the longer-term opportunity to make money increases, as the fear factor compounds in investors’ minds.

It is therefore incumbent upon all investors and fund managers to recognise and understand the perils of recency bias, as well as other behavioural factors, and to endeavour to counter these to ensure one maximises the potential for long-term returns.