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How the past misleads us

Investors are prone to a "recency bias": they believe recent trends will continue. This can be an expensive mistake.
How the past misleads us
  • Investors often lose money by assuming that recent trends will continue.
  • If you must follow momentum, you need an exit strategy. 

With Bitcoin’s price having almost halved since its peak, it’s tempting to have a sense of schadenfreude towards cryptocurrency investors. But we shouldn’t be so smug, because one of the mistakes they made is a common but expensive one which many of us make in other contexts.

This is the recency effect: when we assess the investment outlook we attach too much weight to recent events, and so over estimate the probability of recent trends continuing. So, for example, high recent returns on crypto-currencies led investors to over estimate the likelihood of high future returns.

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