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I can’t think – Part 5 – Recency bias

September 7, 2011
9 people like this post.

One of the failings of the human brain is its inability to ‘weight’ the information it receives. All the information the brain receives is given the same level of importance and it is only through time and subconscious processing that we are then able to filter the information and provide weight to what is important and what is rubbish. The more information we receive on a constant and never ending basis makes it harder and harder for our brains to apply any ‘weight’ to the information we are being inundated with.

Our brains are processing a constant stream of information on a never ending basis giving rise to ‘recency’ bias whereby a greater weight or importance is placed on the more immediate information rather than the more important information. As our brains already finds this task difficult, adding more and more information means we then begin to base our decisions on the latest information we have received, rather than the ‘best’ information we have received. This means that the most recent information we receive is given more weight or validity than the information we received some time ago, even though this older information may actually be of much greater value!

In these times of instant gratification and information overload we are being overloaded with quantity rather than quality information. As a result, we are responding to the decision making process with a greater sense of urgency and essentially being fooled by immediacy and recency. As share traders, this can have a dramatic impact on our bottom line and our psychological strength when dealing with the markets. If we subject ourselves to the constant flow of information that is available via the Internet and other news and noise services it is easy to be drawn into a world of making knee jerk reactions to every piece of news or information that we hear or see. This can have catastrophic effects on traders and investors who are chopping and changing their share holdings and positions based on the ebb and flow of news stories. Far better to have a solid trading plan that allows you to sit back and make your decisions far away from the noise of the markets. In so doing, you steer well away from the short term effects of information overload and ‘recency’ bias.

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9 people like this post.

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