bitez

Are you fighting
the last war?

by Standard Chartered’s Chief Investment Office

Manpreet Gill
Chief Investment Officer, Africa,
Middle East & Europe (AMEE)Y

ou most probably remember what
you had for breakfast this morning.
Can you recall, though, what you hadfor breakfast a week ago? A monthago?
Many of us find it easy to recall events
that occurred most recently, or the lastthing someone said at the end of ameeting – an outcome psychologists
call the ‘recency bias’. However, it ismuch harder to recall what occurred
further back in time, or in the middle
of a particularly long meeting, unless
one took the effort to take notes
and commit key points to long-term
memory.
For financial market investors, thiscan be a particularly troubling biasthat can work against us in making
good investment decisions. Today,
for example, many of my own
conversations with colleagues andclients are very focused on the first halfof the year and whether the gloom weexperienced in the form of a correlated
fall in both equities and bonds is likely
to continue for the foreseeable future.
Many have asked the question about
whether one should indeed just ‘wait
out’ this uncertainty in the supposed
safety of cash – an approach that
history would caution can significantly
hurt long-term returns and thepreservation of wealth, especiallyduring times of high inflation.
This approach is, however, a reflectionof recency bias. It is possible, of course,that recent market trends could
continue for a while longer – indeed
some have made that case based on
an assessment of macroeconomic
data today. However, history shows
us that a continuation of the current
slump would be an exceedingly rare

event. Several investor surveys inrecent weeks have shown sentimentand positioning is already exceedingly
bearish. If anything, this makes acontinuation of H1 2022 market trends
less likely. What is important, in ourview, is to step back and make a
fresh assessment based on economic
and market data today, as opposed
to falling prey to the bias where weassume recent financial market trends
would simply extend, since the lattercan ultimately hurt long-term returns.
The following example may help
clarify the recency bias that cloud
most investors’ judgement. A 2008
study found that insurance demandtended to rise after the occurrence ofa natural disaster. A statistician looking
at historical data would argue that the
chances of a specific natural disaster,for example, does not rise just because
someone has just experienced such an
event. In this case, individuals would
be better off purchasing insurance at
any given time (ideally before, rather
than after, a natural disaster) rather
than rushing to do so in the immediate
aftermath of a disaster – the classic
recency bias at play.
What can we as investors do to
overcome this bias?

1 Start with historical data andfacts. In the example of natural
disasters, potential insurance buyers
should look at the historical occurrenceof natural disasters to gauge thelikelihood of experiencing one in the
future. Similarly, for market investors,
a look-back at the past century’s data
would show us that calendar yearsof negative equity and bond market
returns are exceedingly rare.

Seek out a broad rangeof perspectives. Today, forexample, several investor surveys
would argue investor positioning is far
too one-sidedly bearish for H1 trends
to continue, although a forecast for a
deep recession would argue that thecurrent bearish trend may continue fora while longer for some risky assets. In
our insurance example, it is possiblethat the chances of some types ofnatural disasters (such as weatherrelated ones) may indeed be rising due
to climate change.

2

Start with historical data
and facts

Seek out a broad rangeof perspectives

Ensuring we’re aware of therange of credible outcomeshelps us mitigate the risk that we
automatically assume the most recent
trends are the ones that are most likely
to continue.

3

Keep a clear-headed focus on thegoal. A goal-based analysis can help
place any historical data and possiblenear-term outcomes in perspective. For
instance, if your investment objectives
are long-term, over-responding toshort-term shocks can detract fromthese goals.

Aware of the range ofcredible outcomes helps
to mitigate the risk

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