Question

The last six times you purchased a stock you earned high returns within one year. Thus, you believe you will have the same result with your next stock purchase. This is an example of which one of the following?

Multiple Choice

• Anchoring and adjustment

• Clustering illusion

• Aversion to ambiguity

• Frame dependence

• Recency bias

Answer 1

Recency bias is tendency of investors to focus on recent events and trends and unjustly assume that they are more likely to happen similar in future.

This given case is an example of recency bias because the investor is believing that he will make the same rate of return as he has made past six times.

Other options like anchoring and adjustment and clustering illusion as well as frame dependence and divergent to ambiguity are not the correct option in this case.

Correct answer is option (E) Recency Bias