In recent editions of TimeWise, we’ve examined a number of common human behaviours that can hurt our retirement wealth-building: Overconfidence, fear of missing out, loss aversion, and herding.

In the final segment of our five-part look at behavioural biases, we’ll look at a phenomenon called recency bias.

Recency bias, also known as availability bias, is a type of thinking bias that influences our decision-making and perceptions. It refers to the tendency of people to give more weight or importance to recent events or information while disregarding older or less recent data when making judgments or decisions. A potential pitfall of this bias is that it can lead us to overestimate the significance of recent events and underestimate the significance of events that have happened in the more distant past.

Recency bias shows up in decision-making in all aspects of our lives such as investment decisions, risk assessment, news consumption and even personal memories. It can impact our decision-making by causing us to focus on recent information that is readily available in our minds, leading us to a skewed perspective.

Some examples:

• Performance review at work – if your supervisor succumbs to recency bias, they will tend to remember your most recent work most vividly and will base your overall performance review on the quality of that work; and, they may assume your future work will be of similar quality.
  
  
• Investing – recency bias shows up in our tendency to overweight recent performance over past performance. It impacts our decision-making by causing us to focus on the most recent information that is readily available in our minds; we also assume that recent performance will continue into the future.

Recency bias refers to the tendency of people to give more weight or importance to recent events while disregarding older or less recent data when making judgments or decisions.

Reasons why recent events tend to have a more significant impact on our decision-making include:

• Recalling information close in time or relevant to us is easier. Our brains are wired to work better when things are familiar. It is easier for us to make the link between what we know and how it impacts our current situation.
  
  
• Recent events often carry more weight in our decision-making than older events and experiences because the recent ones are seen as more important because they are more easily remembered. For example, research has shown that we humans are much more able to remember the final numbers/digits/objects of a string of numbers/digits/objects, whether presented visually or audibly.

A very good example in recent times: Our experience with low inflation rates and low interest rates over the last number of years led many to believe that low inflation and low interest rates would continue indefinitely, despite the fact that we have seen high inflation and high interest rate environments in the past (for example, the 1970s).

To counteract the effects of recency bias, there are steps we can take to consciously consider and incorporate a broader range of information, both recent and historical, before making decisions. This includes taking a longer-term perspective (this is particularly important in decisions concerned with wealth-building); seeking out diverse sources of information and an objective perspective; and simply being aware of the potential biases, like recency bias, that can impact our judgment.

We recognize that the actions and decisions of our members have a significant impact on the long-term retirement outcome they are able to achieve. We believe it is important to not only provide our members with high-performing investment products but to also equip them with the information, tools and professional assistance to make the best decisions they can when it comes to their retirement saving.

A key benefit of belonging to a pension plan of a size and scale such as our CSS plan is that we have the collective resources to provide our members with valuable information (like this article) to increase awareness of common human biases such as recency bias, to make retirement planning professionals available to our members to provide them with retirement planning education, information and tools, and to provide an objective perspective to assist our members with their decision-making.