Recency Bias 2023
The 2022 stock and bond market results are in and, as you know, they’re not good. The bond market as measured by the Bloomberg Aggregate bond index was -12.8%, the worst year for high quality, intermediate term bonds over the last century!!! The S&P 500 stock index -18.1% and NASDAQ -33.1%.
What can be expected in 2023? Be careful here! Be careful or you may get bitten by the recency bias bug and that bite could sting for a long time.
Recency bias “is a cognitive error identified in behavioral economics whereby people incorrectly believe that recent events will occur again soon. The tendency is irrational, as it obscures the true or objective probabilities of events occurring leading people to make poor decisions.”1 It can help explain panic selling as well as bubble buying.
Applying recency bias to January, 2023, it suggests a strong tendency to expect the poor bond and stock market conditions to extend into 2023 and, perhaps, beyond. That tendency would not have served investors well in 2008 (S&P 500 -37%, the NASDAQ -40.5%). The 2009 results for stocks were +26.5% for the S&P 500 and +43.9% for the NASDAQ. Both of those results were fairly extreme and didn’t continue at those levels in 2010.
Recency bias is overcome with (a) awareness of its irrational nature, and, (b) following a strategic investment plan that re-balances and adjusts to volatile market conditions. That’s what we do. 2022 was unlike 2021 and I expect 2023 will be unlike 2022.
1Investopedia, Nov. 29, 2022
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