Recently, I stumbled upon an intriguing article discussing recency bias, prompting me to share this concept and explore its relevance in context to Indian Stock Market. According to Wikipedia, recency bias is a cognitive tendency to assign greater importance to recent events over historical ones.
Now, let's delve into recent events that have significantly impacted our cognitive landscape. The stability in the Indian political sphere, coupled with the increasing likelihood of a clean sweep by the current ruling party, has fueled continued growth momentum. The Indian economy has experienced unprecedented GDP growth in recent years, projecting a 6.3% growth compared to the global average of 2.9%. As India aspires to become a US$ 5 trillion economy by 2027, and the significance of this goal amplifies when esteemed owners of major business entities express unwavering confidence and enthusiasm, asserting that "nothing can stop India from becoming a $35 trillion economy by 2047." Interestingly, these projections may not have caught everyone's attention in terms of conversion into the Indian rupee and the local numbering system, represented by ₹ 14 padma (पद्म) . To be candid, I myself was unfamiliar with figures beyond crore and arab, but the intricacies extend further, continuing after padma 樂樂. It seems our ancestors foresaw the need for counting beyond these numbers, anticipating our relentless pursuit of growth. Major indices like Sensex & Nifty showcase remarkable performances, with midcap, small cap, and IPO indices boasting an impressive 60% yearly return.
However, before dismissing this as another piece of investment advice because readers might perceive this as just another piece of investment wisdom, seemingly crafted from the plethora of stale information available online. However, this is not entirely accurate. Today's intention is to guide our focus away from these recent influences. This reminds me of Pratyahara, the fifth limb in the Asthanga Yoga system of Sage Patanjali. In yoga, achieving concentration involves detaching oneself from sensory surroundings, diverting the mind from the numerous pleasure stimuli that entice our sensory organs. Similarly, in making rational investment decisions, one must resist the allure of recent successes and avoid falling victim to the pitfalls of recency bias.
This doesn’t imply disapproval of the recent growth momentum, positive trajectory, and statistical achievements. Instead, the emphasis lies on observing them with tranquility rather than succumbing to mayhem. While India is undoubtedly on the brink of economic expansion, the reminder is clear: historical events should not be overshadowed by recent occurrences, preventing the creation of a psychological trap known as recency bias. As we peruse the annals of history, numerous instances unfold where economic prosperity gave way to crises, sparing not even the brightest minds of the era. In an article from the American Institute of Physics titled "Isaac Newton and the perils of the financial South Sea," it is revealed that despite Newton's overall brilliance and financial expertise, groupthink led him to dive into the South Sea Bubble, resulting in significant financial losses. Newton humorously remarked that he could "calculate the motions of the heavenly bodies, but not the madness of people." History is replete with such instances of folly and chaos, spanning from the financial crisis of 33 CE, the Peruzzi Crash (14th century), Tulip mania (1637), and the Great Tobacco Depression (1703) to the Mississippi Company (1720).
The call is not to predict downfall with every boom but to adopt a panoramic view of the entire landscape shaping current events. To overcome recency bias, understanding how the market works, timing investments judiciously, defining financial goals and risk appetite, and emphasizing value investing become essential. As Benjamin Franklin wisely said, "An investment in knowledge pays the best interest," capturing the essence of rational judgment over prevailing market sentiments. In the words of Warren Buffett, "Be fearful when others are greedy. Be greedy when others are fearful," guiding us through the art of timing the market. Robert Arnott's emphasis on defining financial goals before plunging into the investment pool adds a layer of thoughtful consideration. Finally, Phillip Fisher's reminder, "The stock market is filled with individuals who know the price of everything, but the value of nothing," underscores the significance of informed decision-making and the pursuit of true value investing. Although readers may have encountered these quotes repeatedly, considering them as solutions to recency bias infuses them with deeper meaning compared to conventional investment wisdom.
