What is the recency bias and how does it influence economic decision-making?

What is the recency bias and how does it influence economic decision-making?

Recency bias refers to the tendency of individuals to give more weight to recent events or information when making decisions, while disregarding or underestimating the importance of past data. In the context of economic decision-making, recency bias can lead to suboptimal outcomes.

For instance, investors may be more influenced by recent market trends or performance, leading them to make investment decisions based solely on short-term fluctuations rather than considering long-term fundamentals. This bias can result in overreacting to recent market movements, leading to speculative bubbles or market crashes.

Similarly, consumers may be more swayed by recent price changes or promotions, leading them to make purchasing decisions based on temporary discounts rather than considering the overall value or quality of the product. This bias can result in impulsive buying behavior and potentially regretful purchases.

Overall, recency bias can distort economic decision-making by prioritizing recent information over historical data or long-term trends, potentially leading to irrational choices and suboptimal outcomes.