Recency Bias

After several weeks of intense news coverage of a single large bank failure, client Ottoline Fairbrother telephones her IAR and demands that her entire diversified portfolio be moved into physical gold, saying that bank failures are clearly widespread now. Her plan and circumstances have not otherwise changed. The bias MOST clearly driving her request is:

1. A.Herding, because she is following the actions of a large group of other investors.Incorrect. Nothing in the facts says other investors are selling or that she is copying them; her trigger is the coverage itself.
2. B.Availability bias, because she is judging the likelihood of widespread failure by how easily a vivid, heavily covered example comes to mind.Correct. Saturation coverage of one dramatic event inflates her perceived probability of a systemic problem, prompting an outsized reaction.
3. C.Anchoring, because she is fixing on a specific reference price for her holdings.Incorrect. No reference price appears in her reasoning; anchoring concerns fixation on a number, not on a news narrative.
4. D.Mental accounting, because she is treating different pools of her money as serving different purposes.Incorrect. She is proposing to move the ENTIRE portfolio, which is the opposite of segregating money into separate mental buckets.

Why: This is availability bias, the tendency to judge how likely something is by how easily vivid examples come to mind. Saturation news coverage makes one dramatic event feel representative of a whole system, so the client overestimates the probability of widespread failure and demands an outsized portfolio response. The adviser role is not to dismiss the concern but to supply base rates and context, restate the long-term plan and the reasons for the current allocation, and make any change only if her actual objectives, horizon or capacity have changed.

After three strong years for technology shares, Ottoline Quist tells her adviser she wants 80% of her portfolio in that one sector because it is "clearly what works now." Two years earlier, following a market slump, she had insisted on holding nothing but cash. The bias driving BOTH requests is best described as:

1. A.Mental accounting, the treating of money differently depending on which mental pot it occupiesShe is not segregating funds by purpose; she is extrapolating recent performance.
2. B.Confirmation bias, the seeking out of only that evidence which supports a conclusion already heldHer conclusion reverses when the data reverse, which is the opposite of clinging to a prior belief.
3. C.Recency bias, the over-weighting of the latest results and their projection into the futureCorrect. Her conviction tracks whatever the market has just done.
4. D.Anchoring, the fixing of judgment on an irrelevant reference number such as an original purchase priceNo specific number is anchoring her judgment; it is the direction of recent returns.

Why: Recency bias is the tendency to give the most recent results disproportionate weight and to extrapolate them into the future. It explains both requests: after a slump the recent past looked dangerous, so she wanted only cash, and after a rally the recent past looks safe, so she wants concentration. The practical consequence is buying high and selling low, which is why a written policy allocation and disciplined rebalancing are the standard antidotes.