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March 26, 2001

The Big Picture:
Recency Bias Is Short-Sighted

IT helped prolong unprecedented prosperity and will help shorten any unfolding economic doldrums

By Leon A. Kappelman (kapp@unt.edu)

Leon A. Kappelman ood system interface and report designers are familiar with a concept called "recency bias." It's simply the tendency for humans to place greater importance on more recent data or experience.

Recency bias leads to bad decisions and overreactions. We're all susceptible to it to one degree or another. It's the stuff that makes for stock-market bubbles, as well as bear markets. It's why George Santayana was right when he said, "Those who cannot remember the past are doomed to repeat it."

Our headline-hungry world exacerbates the downside potential of recency bias. In a world filled with daily, sometimes hourly, headlines, there's no doubt that little things get blown out of proportion and even get downright distorted.

Publicly traded companies are guilty of playing to recency bias, too. We pay handsome bonuses to executives for creating illusions in current quarterly accounts, and technology companies are no exception. It's often the case that balance-sheet Band-Aids or profitless future revenue are the short-term motivations behind deals that are more about this week's stock price than the long-term profitability and viability of a company.

Politicians are no less guilty of such behavior, as evidenced by the quest for tax cuts in the shadow of trillions of dollars in federal government debt and even larger amounts of unfunded pension liabilities to citizens and veterans.

Given our own recency bias and our world of up-to-the-minute media magnification, it's not surprising that the Nasdaq has gone from one extreme to another in less than a year, with the index of the 100 largest mostly high-tech Nasdaq stocks falling more than 60% in the interim. With the financial media belaboring to the point of obsession the recession question, all day every day, it's a wonder that this tech-heavy index is holding up as well as it is.

But let's step beyond our biases and the headlines and lengthen our perspective a bit. As the new century began, unemployment was at a 30-year low, according to the government. Despite the daily headlines bemoaning recent layoffs, unemployment appears to have barely nudged up one-tenth of 1% during the past five quarters.

Perhaps even more telling is the Federal Reserve's reckoning that we'd seen only eight months of recession in the last 17 years of the 20th century. Putting that "4% of the time in recession" into perspective, the Fed goes on to point out that from 1853 to 1953, the country was in recession 40% of the time.

If you doubt that technology is at least in part responsible for the economic vigor and resilience we've experienced, consider that during that same 17-year period, we've seen sales of U.S. software companies increase about 3,500%, and the market value of publicly traded U.S. software-related companies increase more than 7,000%. Even with the steep fall in the market valuation of the Nasdaq 100, things still look pretty rosy.

Bear in mind that these high-tech growth measures are only correlated with our more vibrant economic experience; they're not proof of a causal connection. If you need evidence of that, consider that telephone-pole density per acre is highly correlated with murders per acre, but poles don't cause murders. Nevertheless, in the more than 45 years since the U.S. economic expansion that began in May 1954, and which coincides closely with IBM's first computer becoming commercially available to businesses that same year, we've experienced only 75 months of contraction out of 660 through December 1999, or recession less than 12% of the time.

Is this a "New Economy"? Probably not in the sense that stock-market hypesters and media mavens imply when they say it. But just as information and communication technologies, when combined with good management, can help make companies more agile and responsive, so too do they affect the economy of which those organizations are a part.

So when your recency bias gets you thinking that it's time to sell all your investments, or at least dump everything related to technology, remember this: We've just begun to experience the benefits and rewards of the Information Age. Stay the course. It's just starting to get interesting.

Professor Leon A. Kappelman is director of the Information Systems Research Center in the College of Business Administration at the University of North Texas. You can reach him at kapp@unt.edu or on the Web at http://www.coba.unt.edu/bcis/faculty/kappelma.