The tendency to place excessive weight on recent experience when forming expectations about the future — extrapolating short trends into indefinite futures.
Deeper Explanation
Recency bias causes investors to buy after extended rallies (assuming continuation) and sell after extended drawdowns (assuming continuation of decline). It produces herd behaviour at market tops and capitulation at market bottoms — exactly the opposite of disciplined investing. The antidote: longer reference periods. Rather than asking "what has happened in the last 6 months?", ask "what has happened over the last 30 years?" Base rates are far more informative than recent trend. For individual companies, recency bias causes overweighting of the most recent quarter's results while underweighting the multi-year earnings trajectory.
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