One thing we as humans are very good at is emphasizing what has recently happened and projecting it into the future. This is known also known as recency bias.
This occurs from things as varied as military warfare to economics. Those two even have a common refrain…“soldiers are always preparing to fight the last war” and “economists are always fighting the last recession.”
We can also see this in our human tendencies. Many people increase their life insurance AFTER someone they know dies or purchases flood insurance AFTER the event. As time goes on, we are also likely to cancel those policies because we haven’t needed them. We think why am I paying this money?
We think if things are going terrible, they are going to continue being terrible forever. On the financial side, if your portfolio value seems to be dropping, it’s tempting to say, “At this rate, if this continues, I won’t have any money [insert number of months] from now.”
On the other hand, if things are going well, we expect them to continue going well forever. We saw this in the fall of 2021 when the stock market and many stocks were at all-time highs. The valuations were extreme, but it didn’t stop people from predicting what had recently happened would continue. They assumed the stocks would continue to go up. They predicted they would make much more money in the next few years.
We would do well to make our memories go back just a little bit further. That way, we may find ourselves recalling a time when the tragedy did happen and insurance helped or the market improved after a large fall.
If we can do that, we stand a much better chance of avoiding falling into the same traps over and over again.