Recency bias: I like fresh things!

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Novelty bias: I love new things!

Novelty bias, as the name itself suggests, means to pay the most attention to recent news and not to consider past (old) news. We can see the importance of novelty bias in our daily lives.

At the time of appraisal in corporate organizations, many employees start working in extra time, two months before the assessment to meet their goals. This affects their manager's decisions when they see the extra effort being made by that employee. This allows managers to focus more on the performance of the employee's current days, rather than looking at the performance of the entire year. These are the power of novelty bias.

The novelty bias diverts attention from the long-term plan to short-term results and its effects. This way the investor starts to look at the recent growth of investment opportunities and decides whether to invest in it or not. Typically, annual reports help with investment planning, but now times are changing, and even short-term results have the potential to affect investors.

When it comes to investing, investors look at the company's current profit figures.

Examples:

If an investor has invested ₹ 50,000 in a mutual fund and has worked on it for at least ten years, then it is certain that the mutual fund has given him a growth advantage. In ten years, the market value of his investment increased to ₹ 1,50,000. Then in the last two months, the price fell to ₹ 1,20,000. The investor is seeing his investment performance as a loss of ₹ 30,000 in two months, but he is not seeing a total profit of ₹ 70,000 in the last 10 years. This is called recency bias. Due to market disturbances, investors are likely to stay away from equity.

Investors often turn away from equity when the market falls sharply, instead they should invest because they can buy more at lower prices. Novelty bias can alter judgment and harm our financial interests in the long term.

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How to deal with novelty bias?

The novelty bias always sees the same aspect of the coin. It always risks thinking according to one aspect, but obviously, only one aspect cannot be ignored. To fully handle the investment, investors should always keep an eye on the company's year-round reports, as well as the current status of stock rates and returns on investment. Let's look at some ways to avoid novelty bias -

1. Getting a grip on the market

The equity market operates on a pattern. The market first picks up, and then, the market declines, and this cycle continues with current global market scenarios. It is important to understand this pattern well and only after understanding it, plan your investment carefully.

2. Always focus investment on your financial goals

 Your investment should not be a charge taken decision. This is always true if you look at the strategic planning data based on your goals and then convert those long-term investments towards financial goals.

3. Seeking professional advice for decisions

 If you are ever in doubt about your savings and you plan to make changes in your investment, it is always a good idea to seek the help of a professional advisor. The equity market is a complex concept and can sometimes be difficult to understand its intricacies.

4. Preparation of a strategic portfolio and asset allocation

The most important task is to allocate assets to make your portfolio good. For correct portfolio performance, it is advisable to maintain the portfolio and relocate the asset whenever possible.

Wrapping up

Now that we understand the problems and solutions of novelty bias, we can discuss its further details in the next module.

A Quick Review

  • Novelty bias affects investors and traders to decide their investment plans based on current and recent information and ignore the long-term performance of the company.
  • The novelty bias is the same as an investor changes his plan from Bearish to Bullish just after seeing a negative candlestick in the stock market chart.
  • There are ways to avoid this bias such as keeping an eye on the big picture of the future and engaging an advisor to help you make investment decisions.
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