From Trends to Traps: How Recency Bias Impacts Investor Decision-Making

“If everyone’s getting rich off stocks, why not me? It was a typical Saturday morning when I met up with my friend Rahul at our favourite coffee shop. With the aroma of freshly brewed espresso in the air, he excitedly shared his latest investment stock. “Did you see how much the stock has surged this week?” he asked, eyes gleaming with enthusiasm. Without hesitating, he dove into stories about friends who had made quick fortunes by jumping on recent trends. He decided to invest heavily based on that short-term spike.

A few weeks later, as news headlines shifted and prices plummeted, so did Rahul’s confidence - and his bank balance. It was a painful reminder that sometimes - what glitters isn't gold in the world of investing. This experience shows how emotions and cognitive biases can lead even seasoned investors astray.

Common Recency Bias Traps in Real World

Many investors chased these winners expecting the run to continue. But markets are cyclical, not linear.

Example: Gensol Engineer

The stock witnessed a strong run-up  from June 2023. Following which, the number of shareholders doubled from March 2024 (60,735) through March 2025 (107,447). But those who invested based only on recent performance were caught off guard as delays in servicing term loan obligations surfaced. The stock witnessed sharp correction and the investor wealth was wiped out.

Source: screener.in

The story is no different for mutual funds (ratings≠ returns). Let’s take the case of Quant Flexi Cap Fund.  This fund delivered exceptional returns from 2020 to 2022, climbing the ranks to a 5-star rating. The AUM (Growth option, Direct Plan) increased from INR 200 crores in Oct '22  to INR 3,733 crores in Jul’24 clearly showing how investors favour recent high performers. But by Dec’24, the performance dipped sharply - the AUM also decreased, though marginally,  in the subsequent quarters.

Source: Valuerearchonline.com

AUM in crores of Quant Flexi-cap fund (Growth, Direct):

Oct’22	Jan’23	Apr’23	Jul’23	Oct’23	Jan’24	Apr’24	Jul’24	Oct’24	Jan’25
200.46	311.09	447.75	653.89	904.44	1,676.26	2,927.68	3,733.18	3,705.60	3,314.01

Source: Advisorkhoj.com

Axis Large Cap Fund (formerly Axis Bluechip Fund) was one of the top performing funds in mid-2021. The size of the AUM (Growth Option, Direct Plan) grew substantially from April’19 through April’22. Investors selected the fund at that time, believing that the past good returns would continue in the future. The fund's performance has changed since then - it is no longer ranked among the top quadrants and is in fact ranked among the laggards.

Source: Valueresearchonline.com

AUM in crores of Axis Bluechip  fund (Growth, Direct):

Apr’19	Apr’20	Apr’21	Apr’22	Apr’23	Apr’24
993.71	3563.98	7895.94	11,120.39	11,589.25	12,106.74

Source: Advisorkhoj.com

This shows that  a fund that has got a  5 star rating can witness mean reversion and it can work the other way round. Why? Because past returns aren’t future guarantees - they’re rearview mirrors, not roadmaps.

What is Recency Bias?

Recency bias (or Availability Bias) is a memory recall bias where we tend to recall the most recent information. The recency effect is one of the components of the serial position effect, a phenomenon which was first discovered by the German psychologist Hermann Ebbinghaus in 1885. He concluded that the ability to accurately recall items from a list depended on their location on the list. In investing, it usually  means relying on the latest market trends - chasing hot assets or funds just because they’ve recently done well or adopting a negative outlook after a  market crash. This short-sightedness often leads to impulsive decisions - buy when everyone is euphoric and sell when markets fall. 

How to Beat Recency Bias

• Acknowledge it: Know the bias exists.

• Stick to a plan: Build a strategy and trust it.

• Stop doomscrolling: Social media isn’t your portfolio manager.

• Check less, think more: Review quarterly, not daily.

• Ask better questions: What’s driving these returns?Is this sustainable?How does this fit my goals?

• Think big picture: What’s the macro story — interest rates, inflation, policy?

How a Financial Advisor Helps

A good advisor acts as a buffer between you and your worst impulses. They:

• Serve as a filter between you and market noise

• Keep your portfolio aligned with your financial goals

• Deter performance-chasing

• Rebalance portfolios when needed — not when Twitter panics

• Offer perspective during volatility

Summary:

In investing, just because something’s hot today doesn’t mean it’ll stay that way tomorrow. Recency bias can quietly derail your long term financial goals. 

Don’t let yesterday’s winners ruin tomorrow’s goals. Be mindful. Be strategic. And when in doubt - seek advice.

Because the real investment edge? It’s not about timing the market.

It’s about outsmarting yourself.

From trends to traps — let awareness be your edge.