Recency Bias Comes as No Surprise, Even for Pension Funds
Institutional Investor reports on a behavioral foible to which even professionals and institutions are not immune:
The most common mistake pension funds make is evaluating managers based on their short-term performance, giving too much praise to managers having a good run and over-criticizing firms experiencing short-term underperformance, according to Michael Oyster, consultant at Fund Evaluation Group. Oyster, who authored a paper on avoiding the pitfalls of investing for FEG's February Research Roundup, said three years is too short a time period in which to assess managers. FEG conducted a study which showed that all the U.S. large-cap managers that posted top quartile returns for the 10 years ending December 2005 ranked below the median for at least one rolling three-year period during that time.
Obviously individuals (and the mobs they join) have a similar problem in evaluating funds, managers, asset classes, and individual securities.