Top Ten Behavioral Biases, Illustrated #9: Fighting the Last War (Recency Bias)

By every objective measure, Joe Flacco is a decent, but not great, NFL quarterback. However, he parlayed one great playoff run into a Super Bowl championship and a huge contract. ESPN’s Merrill Hoge decided that one great run over a very small sample size that included a Super Bowl turned Joe Flacco into the best quarterback in the NFL.

That’s recency bias – our tendency to overweight and overemphasize what just happened over the broader body of evidence. Oh, and by the way, after that great run, Flacco went back to being okay but not great.

Its close cousin is the availability heuristic, whereby we tend to think that that which is most readily recalled provides the best context and basis for future decisions. Its why we’re generally far more afraid of sharks, responsible for six deaths per year worldwide, than mosquitos, which are responsible for 750,000 deaths per year.

In fact, as explained by Freeman Dyson, sharks actually save the lives of swimmers. On average, each swimmer killed by a shark saves the lives of ten others by keeping people out of the water: “Every time a swimmer is killed, the number of deaths by drowning goes down for a few years and then returns to the normal level. The effect occurs because reports of death by shark attack are remembered more vividly than reports of drownings.”

Per William James, “The attention which we lend to an experience is proportional to its vivid or interesting character; and it is a notorious fact that what interests us most vividly at the time is, other things equal, what we remember best.” Think name recognition in politics.

In the investment world, we’re especially susceptible to these biases.

It’s why we purchase defensive investment products and strategies right after the market crashes. We lock the barn door after the horse is gone.

As the famous proverb goes, that’s why we are so prone to “fight the last war.” An historical example is when France built the Maginot Line in the 1930s. It was a series of concrete fortifications constructed along the border with Germany; the French didn’t bother to fortify their border with Belgium. The Maginot Line would have been a great move in WWI (then the last war), where armies moved slowly and concrete fortifications were significant hindrances. However, it didn’t help in WWII, when Germany flanked the Maginot Line and invaded from the north, through Belgium.

We all tend to place too much emphasis on the recent and latch onto what’s immediate…like the girl next door.

We often lose sight of the longer-term because of our obsession with the vividly immediate. Lunch tomorrow is a long-range plan. We routinely do without “lasting treasure…”

…to fixate on “a moment’s pleasure” even though we know – unequivocally – that focusing on the long-term is the right thing to do, in our lives and in our businesses.