Carl Richards is a Certified Financial Planner™ and creator of the Sketch Guy column, appearing weekly in The New York Times since 2010. The following article is reproduced with permission from his weekly newsletter and his website can be found here.
Greetings, Carl here.
One crazy thing we do as humans is take the recent past and project it indefinitely into the future.
As the news cycle has sped up, this problem has only gotten worse. It used to feel like the “recent past” went as far back as a couple of years. Now, it can feel like the last couple of minutes.
We think if things are going terrible, they are going to continue being terrible forever. If your portfolio value seems to be dropping, it’s tempting to say, “At this rate, if this continues, I won’t have any money [insert number of months] from now.”
On the other hand, if things are going well, we expect them to continue going well forever. If every year for the past five years you’ve gotten a bonus in January, and in October of this year you want to buy a new house, it may be tempting to factor that bonus you will surely get in January into your decision. Of course, it’s terribly disappointing if that bonus doesn’t come.
Turns out, this phenomenon has a name. It’s called Recency Bias—and if you’re not aware of it, it can wreak havoc in your life.
The only solution I’ve come across is to lengthen your definition of the recent past.
As they say, those who don’t learn from history are doomed to repeat it.
We would do well to make our memories go back just a little bit further than the common goldfish. That way, we may find ourselves recalling a time when the bonus didn’t come, or the market was better, or whatever financial boon or burden we need to keep in mind is a distinct possibility in the very near future.
If we can do that, we stand a much better chance of not falling into the same traps over and over again, not just in our finances but in every aspect of our lives.
…
-Carl
P.S. As always, if you want to use this week’s sketch, you can buy it here.
