Following a prolonged three-year equity bull market, an investor allocates 100% of their savings to equities, convinced that recent double-digit gains will continue indefinitely without correction. Which behavioral bias is this?

[ A ]Familiarity Bias

[ B ]Recency Bias[ CORRECT ]

[ C ]Anchoring Bias

[ D ]Framing Bias

Takeaway

Option B is correct: Recency Bias

Derivation

Recency bias occurs when investors heavily extrapolate recent past events and performance into the indefinite future, assuming current trends will persist. In bull markets, this leads to excessive risk-taking, while in bear markets, it triggers unwarranted risk aversion. This question evaluates the candidate's understanding of how emotional extrapolation distorts prudent portfolio design. The typical trap is mistaking recency bias for familiarity bias or anchoring.

Why the others fail

A — Familiarity Bias

Familiarity bias leads individuals to invest exclusively in well-known domestic or employer stocks rather than extrapolating recent returns.

C — Anchoring Bias

Anchoring bias involves fixing valuation benchmarks to a specific initial price reference point instead of projecting trends.

D — Framing Bias

Framing bias occurs when decision-making changes based on how information is visually or verbally presented.