Understanding “recency bias”
How this proven strategy will help you to win big
Betting is more than simply putting your money on a horse, golfer or football team… and then whatever the outcome, repeating the same process again and again, with the aim of making a long-term profit.
It’s something I’ve done for the past 30 years… and over this time I’ve got to view it as far more than a series of one-off cash transactions. No, it’s much more than that.
Dealings with professionals and amateurs alike over the years, I’ve come to realise that betting is a mental exercise as much as a financial one. In fact, without the right mental approach you can have all the money in the world and still not win.
One aspect of betting which perfectly illustrates this view is that of “recency”.
And the description below (one which I’ve reproduced almost word-for-word from and an article by Terence Tao on masterclass.com) talks about this phenomenon and how it effects, often adversely, our judgement.
And quite possibly your judgement, when you’re looking at figures for a betting service.
So take a couple of minutes to read what Terence has to say. By doing so, I think you’ll realise how and why you should maybe take a moment, pause, and really consider, before you make knee-jerk reactions when a service isn’t performing as you would hope/expect.
This article will stop you turning your back on a winning opportunity, and walking away from a potential cash payout.
Here’s the article…
Recency Bias Definition
Recency bias (also known as availability bias) strikes when people believe events of the recent past provide a window into how things must be in the future.
In reality, recent events might have some bearing on future events, but not the outsized one people mistakenly assume when falling for this short-circuiting type of cognition.
For example, suppose you bet a coin will come up heads ten times in a row. Now imagine it actually does so. This recent event might lead you to believe you have exceptionally good odds to bet the coin will do so again the next ten times someone flips it. In reality, you still always have a one in two chance no matter how extraordinary recent events might have made it seem.
The recency bias resembles the primacy effect (the belief whatever you hear first about something must be the most important data about it) as well as the serial position effect (the belief the earlier you hear about something, the more accurate it must be).
All of these concepts can skew your thinking in an irrational direction.
Why Is Recency Bias Detrimental?
The recency bias is just one sign of how human memory and intuition can be faulty. Recent events feel more ominous, pressing, and important due to their immediacy.
When people rely on these events to shape their decision-making, rather than take a wider angle view of probability and history, they can make poor decisions.
The concept of recency bias is a common point of study within the world of behavioural finance.
This is largely due to the fact people so often make haphazard investment decisions or poor financial planning choices because of recent events and new information.
When your very livelihood is at stake, it’s even more important to know how to think as accurately, calmly, and rationally as possible.
3 Tips to Avoid Recency Bias
Recency bias can lead to all sorts of personal mishaps unless you mitigate it.
Keep these three tips in mind to avoid the recency effect in your thinking:
1. Focus on more reliable metrics. Weaken cognitive bias by focusing on metrics of greater importance. Instead of focusing on recency, focus on the actual numbers and probabilities of any event occurring. Seek out expert advice, too. For example, working with a qualified financial advisor could lead you to make safer and more profitable investments than simply paying attention to the daily fluctuations of the stock market.
2. Keep yourself grounded. Focus on the fundamentals of how the world works when a new piece of information starts to destabilise you. Take a minute to breathe before letting a recent event sway you to make any rash decisions. Especially when it comes to financial goals, it’s important to base decisions on more sound, tried-and-true principles than the mere news of the day.
3. Look to the past. With each passing day, we have a greater understanding of both the recent and distant past. Rather than basing your decisions on what happened today or yesterday, take a wider view. For example, suppose a mutual fund performed poorly over the last year but has a terrific all-time track record.
In this case, the recent performance is more likely an aberration than a sign of any significant underlying issues.
Examples of Recency Bias in Different Fields
You will encounter or observe recency bias everywhere, from financial markets to sports and beyond. Here are three examples of how recency bias plays out in different fields:
1. Long-term investing: Financial plans must be iron-clad, especially given how much the market can fluctuate over a long period. When it comes to long-term stock portfolio management or asset allocation, selling portions at any sign of trouble will likely cause you unnecessary grief. Instead, focus on takeaways from your portfolio performance over many years to predict whether or not you should take action in a specific circumstance.
2. Short-term investing: Wall Street is synonymous with volatility, and volatility can fuel a person’s propensity to irrationally prioritise recent information. In the short-term, many rookie investors think a bear market will always keep booming or a “bull market” will remain dismal in perpetuity, leading them to take on a very reactive investment strategy as a result.
In reality, it’s important to remain clear-eyed about market fundamentals rather than think recent fluctuations are always a sign of how things must be in the near or distant future.
3. Sports: You might succumb to this psychological phenomenon while playing sports without even knowing it. Suppose you’re playing as a quarterback and another team member has caught the ball the last three times you threw it to them, despite having a poor track record in general. The recency bias would lead you to believe you should keep passing it their way, but their success in catching it is actually more likely to be an anomaly given a more objective look at their broader performance over time.
So what we learn from this excellent article (read in full here) is that as backers we have to be very careful not to make quick, ill-informed decions. And by avoiding these knee-jerk actions, when a horse gets beaten, or our football team loses, we have the potential to become winning professional gamblers.
Because that’s what these savvy investors do. That’s why they win long-term, and why “amateur backers”, if they’re not careful, can do rash things, on the spur of the moment, which will cost them money over time. And remember, ending up with more money than we started… that’s the main reason why we all bet.
OPINION: If you don’t know the phase “act in haste, repent at leisure” – then you should. It sums up to a tee what recency bias is all about, and if you can understand this principle, and adopt it into your own betting… you will win more money.
