How investors interpret shifts during periods of uncertainty depends on recent and generational experience. When these go unchecked, they harden into biases that obscure opportunity and magnify risk.
This is the view of Horacia Naidoo-McCarthy, the manager in the Institutional Clients team at Allan Gray, who says that in today’s shifting environment, investors might be prone to falling into behavioural traps that can thwart investment success.
“Behaviour often overrides data, history and fundamentals. Becoming aware of these behavioural biases is the first step to guarding against them,” says Naidoo-McCarthy.
How recency bias traps investors
She says several forces are creating fertile ground for investors to
fall prey to recency bias — the tendency to overemphasise the importance of recent events in assessing the future.
One of the factors is persistent inflation and higher-for-longer rates.
“Inflation has proved to be stickier than expected but some sectors, business models and countries are less vulnerable than others.
“Today, in the US, despite persistent inflation, stock market performance has been resilient and this might reinforce the belief ‘this time is different’ when the underlying trend might be reversing.”
Another factor is US exceptionalism and market concentration.
The MSCI World Index remains dominated by a narrow group of US mega-cap tech stocks.
“Concentration has skewed index performance, widening the gap between prices and fundamentals. Exceptionalism has spilt beyond markets into foreign policy, entrenching the belief that the US is uniquely insulated from global pressures,” Naidoo-McCarthy says.
She adds that many South African investors see offshore markets as superior; however, she reminds investors that from 2000 to 2010, local shares, largely driven by the global commodities boom and supportive foreign flows, outperformed global shares. This culminated in local shares outperforming global shares by 4.1% over more than two decades.
“The takeaway is that when markets appear resilient despite rising fragility, recency bias thrives. Investors focus on what has worked — US tech, offshore exposure, concentration — and underplay the possibility of regime change. Index-level strength can mask increasing vulnerability,” says Naidoo-McCarthy.
Generational anchoring: Why lived experience shapes risk perception
She notes that, according to author and investor Morgan Housel, perceptions of risk are shaped by the era people grew up in. Research also shows that economic and market conditions experienced early in a working career can define what individuals perceive as normal, creating lasting reference points that influence investor behaviour.
“An investor who is 48 years today, who entered the workforce in 2001, when the rand traded at R8 to the US dollar and who lived through the tech bubble, the global financial crisis and the deflation of the ‘everything bubble’, will naturally view volatility and currency moves differently from a 28-year-old, who has only ever known the rand to be around R17 to the US dollar and a world dominated by US tech giants.”
She adds that these lived experiences become default assumptions, influencing what feels safe, expensive or what can be seen as opportunity versus risk, even when long-term data tells a different story.
“Generational memory is a powerful anchor. When left unexamined, it morphs into behavioural bias.”
How these factors influence investment decisions
“The interplay between recency bias and generational anchoring is visible in how investors have allocated capital in recent years. These biases create illusions of inevitability, obscuring cyclical reality,” Naidoo-McCarthy points out.
She explains that there are many consequences of this behaviour, including overlooking opportunities in undervalued areas in favour of popular, overvalued areas.
“Risk is also underestimated where valuations are stretched and overestimated where valuations have been punished, often due to poor sentiment,” she adds.
Finally, investors might misread the early signs of regime transitions, assuming that the status quo will endure indefinitely.
“A valuation-driven approach aims to counter these biases by grounding decisions in fundamentals rather than narratives, momentum or generational assumptions,” Naidoo-McCarthy says.
Horacia Naidoo-McCarthy is a manager in the Institutional Clients team. She holds a Bachelor of Science (Honours) and a Master of Science in Genetics, both from the University of KwaZulu-Natal, as well as a Doctor of Philosophy in Human Genetics from the University of Cape Town.