What 'Shark Week' can teach investors about a money 'survival instinct'
It's "Shark Week," the annual television-programming event on Discovery that stars the ocean's apex predators. And perhaps the most famous of these fish — the fictional, man-eating great white from the 1975 thriller «Jaws» — can teach an important money-saving behavioral lesson to investors.
Specifically, investors have a tendency to get swept away by the fear or euphoria of the recent past. This is called «recency bias,» and it's often accompanied by financial loss.
This bias leads investors to put too much emphasis on recent events — say, a stock-market rout, or the meteoric rise of bitcoin or a meme stock like GameStop.
«People need to understand that recency bias is normal, and it's hard-wired,» said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner. «It's a survival instinct.»
Even so, allowing short-term emotion to guide long-term financial decisions is generally counter to investors' best interests, as is often the case when selling stocks in a panic.
Recency bias is akin to a common yet illogical human impulse, such as watching Steven Spielberg's classic summer blockbuster «Jaws» and then being afraid of the water.
«Would you want to go for a long ocean swim after watching 'Jaws'? Probably not, even though the actual risk of being attacked by a shark is infinitesimally small,» wrote Omar Aguilar, CEO and chief investment officer at Schwab Asset Management.
Fitzgerald equates the impulse to a bee sting.
«If I get stung by a bee once or twice, I'm not going to go there again,» said Fitzgerald, a principal and founding member of Moisand Fitzgerald Tamayo. «The recent experience can override all logic.»
Here's a recent real-world illustration.
The financial services sector was among the
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