Recency bias: Why some forecasts fail to meet expectations

by 26 Jan 2015
By David Lykken
Special to MPA


Recently, on my Lykken on Lending radio show, I had the opportunity to interview Les Parker of Loan Logic--an industry expert who has had tremendous success forecasting the future of the industry, despite significant criticisms about those forecasts. In our conversations, he said something that particularly caught my attention. When industry commentators develop their forecasts, they often look at the direction the interest rates are currently heading and assume they are going to continue heading in that direction. But that isn't necessarily the case.

In psychology, there is a phenomenon called recency bias. Our perception is often colored by the last thing we witnessed. Rather than taking an experience as a whole, a disproportionate amount of what we remember of the experience comes from how it ends. We remember the final words of the speech, even if we don't remember what is was really about. Then, we just the whole speech based on that small part that we remember. As they say, all is well that ends well.

Now, back to making predictions about the market. Why are some forecasts overconfident and some under-confident? I believe it's because of this recency bias. We tend to over emphasize the way the market is right now rather than taking it as a whole. If we're going to make an accurate guess about the direction the industry is headed, we've got to broaden our perspectives and think more long-term. We've got to be able to see the forest for the trees. Only then will we be able to make unbiased judgments about what the future may hold.

David Lykken is 40-year industry veteran who has been an owner-operator of three mortgage banking companies and a software company. As co-founder and Managing Partner of Mortgage Banking Solutions, David consults on virtually all aspects of mortgage banking with special emphasis on executive leadership development, corporate strategic direction and implementation, as well as mergers & acquisitions.

A regular contributor on CNBC and Fox Business News, David also hosts a successful weekly radio program called “Lykken On Lending” (
www.LykkenOnLending.com) that is heard each Monday at noon (Central Standard Time) by thousands of mortgage professionals. Recently he started producing a 1-minute video called “Today’s Mortgage Minute” that appears on hundreds of television, radio and newspaper websites daily across America.

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