Five Years On: Recency Bias and the Risk of Short-Term Thinking

Recency bias is when we remember recent events and prioritise this information when making decisions. Take English weather as an example. After enduring months of dark, rainy winter, a sudden weekend of sunshine and people put their sundresses and shorts on and fire up the BBQ, expecting (hoping) that the good weather continues. A few warm days later, the gloomy winter feels like a distant memory. So, when heading out, you leave your coat behind convinced that the sunshine will last, only to be caught in an unexpected downpour and reminded that the British weather is anything but predictable. This is recency bias in action in which placing too much weight on recent events while ignoring broader seasonal patterns.

The psychological phenomenon of recency bias is also applicable to financial markets. In behavioural finance we witness recency bias when investors focus on recent information and market events as the main driver for investment decisions. When investors overemphasise recent market trends in their investment decisions, they can overlook robust long-term patterns and historical data. This can often lead to unbalanced investment decisions, which can negatively impact portfolio performance in the long run. Common examples of recency bias in investing include chasing investments due to media hype and underestimating risk based on recent market stability.

A financial example of recency bias can be found during the challenging market conditions triggered by COVID-19. When it was announced as a pandemic by the World Health Organisation 5 years ago, it turned the world upside down and sent financial markets into one of the sharpest single day downturns ever. It was easy for investors to focus on the market disruption and turmoil in front of them and forget about the long-term benefits of exposure to investment assets and compounding. Yet despite the initial turmoil, markets rebounded posting positive returns by the end of 2020. Five years on, this serves as a powerful reminder to keep a long-term perspective and ensure that recent market events, or a ‘recency bias’, doesn’t cloud investment decisions and portfolio performance.

Historical market recoveries after turbulent periods demonstrate that reacting emotionally to downturns in the short term often leads to missed opportunities. If investors had leant into recency bias and sold their global equity positions in March 2020 due to the market decline, they would have missed out on the remarkable recovery that followed which saw a 47% return between the end of March and the end of December in world equity markets, illustrated below. 

Source: MSCI World Index, FactSet. Data from January 2020 – March 2025.

It’s important to note that recency bias works both ways. Its effects can also be felt by investors who assume that just because returns of an asset have been very positive recently, the asset will continue to outperform. As we have seen, whilst past performance is no guarantee of future results, patient investors have been rewarded for sticking through market movements instead of impulsively reacting to past performance and resulting in emotional investing rooted in recency bias.

Fast forward to the present day and it is easy to see how the current geopolitical events, with economic uncertainty and volatility across markets, could trigger recency bias in investors causing them to focus too much on recent news and market movements whilst overlooking long-term trends. At atomos, as long-term investors, we aim to avoid recency bias by striking a balance between managing short-term risks and ensuring our portfolios and strategic asset allocation decisions are in line with long term investment themes.

Five years on from COVID, many lockdowns later, we all live with newfound appreciations for our health, the value of in-person connections, and the importance of balance in our lives. Just as individuals have gained clarity on what truly matters, investors must also apply these lessons and resist the urge to react impulsively with a bias towards recent events and instead staying committed to find balance in long-term financial resilience.

The Noise

• The UK inflation rate fell to 2.8% in February, coming in 0.2% below market expectations. This decline in prices was mainly driven by clothing prices falling 0.6% in the 12 months, so consumers may find that clothes feel relatively cheaper at the moment. Off the back of this data, markets have placed higher likelihood that the Bank of England (BoE) will cut rates twice this year, meaning traders think borrowing costs could go down by an estimated 0.5% by the end of 2025. 

• Equity markets remained dampened this week, with traders taking caution ahead of Trump’s ‘tariff day’ next Wednesday, April 2nd. Trump has claimed that when he announces his wider trade tariff regime next week, not all of his threatened levies would be imposed, and some countries might get breaks. Yet, similar to the boy who cried wolf, the market has seen trump cry tariff many times in this first quarter of 2025, with many delays and revisions. All will be revealed by Trump on Wednesday next week – Watch this space!

• Trends in financial markets could make your morning brew a bit more expensive! Since the beginning of 2025 coffee prices spiked by 20% on the commodity market (a financial market where you can buy and sell goods taken from the earth). This is because there is such a high demand for coffee but a lower supply due to four consecutive seasons of bad weather conditions. Brazil is one of the world largest coffee producers and it suffered one of its worst droughts ever. Consumers will likely feel these effects as price increases trickle down into supermarkets. 

The Numbers

GBP Performance to 27/03/2025

Source: Bloomberg, data as at 27/03/2025

The Niche
A fun financial fact 

The Bank of England has a £100,000,000 (one hundred million pound) banknote, known as the ‘Titan’. It’s not in circulation but serves to support the value of banknotes issued in Scotland and Northern Ireland. This is the highest-denomination banknote the Bank of England produces!