English all-rounder Ben Stokes played a major role in England’s win over New Zealand in the World Cup final at Lord’s, scoring 84 and taking the game into a super over, where they clinched a remarkable victory. He followed it up with a breathtaking 135 not-out in the 3rd Ashes test at Headingley, taking England to an improbable one-wicket victory in August’19.
More than 1,000 England cricket fans were surveyed by the Professional Cricketers’ Association and NatWest in honour of the 50th anniversary of the Professional Cricketers Association (PCA) Awards in October’19 where they were asked to rank greatest performances in the last 50 years of England Cricket. Little wonder that both of Stokes’ performances made it to the top 50 list.
Closer to home, there was a raging debate about India’s first choice wicket keeper in India’s four-match Border-Gavaskar series to be played down under. Prior to the tour, Wriddhiman Saha was, without a doubt, a far better keeper than Pant. But Pant who had 2 overseas hundreds and 2 nineties against his name – and had failed in 18 of his last 22 innings got a nod in the second test and the rest is history. KL Rahul, got a test recall as a stand in keeper-batsman on the back of a brilliant IPL.
And after the first T20 match, the batting form of Indian skipper Virat Kohli was being questioned. On 12th of March, 2020, he surpassed Ganguly’s unwanted record for the maximum number of ‘ducks’ in international cricket(13).
The above outcomes have a clear imprint of ‘recency bias’.
a) But for recency bias and the English fans would have considered Graham Gooch’s 154 not out against West Indies at Headingley in 1991, when the series was at stake or Mike Atherton’s Johannesburg vigil in 1995/96, which led to a win or Kevin Pietersen’s 186 at Mumbai in 2012/13 above Stokes’ efforts.
b) Indian selectors would not have handed a Test-match recall to KL Rahul, on the basis of his ‘white ball’ IPL performance.
c) And those criticising Kohli would do well to remember his feats while chasing down targets. Kohli has scored 5388 runs at a stupendous average of 96.21 with a strike rate of 97.77 while chasing in ODI’s. He also answered his critics with a swashbuckling 73 of 49 balls on 14th march and became the first batsman in world cricket to score 3000+ runs in T20 internationals. (average 50.86)
Likewise, investors too fall victim to ‘Recency Bias’, by giving more importance to near term performance over long term performance.
“In God we trust, all others must bring data” said W. Edwards Deming. Deming, a champion of using data and measurement, suggested that problems should be solved through robust data collection and analysis.
So here is the data. We analyzed the performance of all equity mutual fund schemes for consecutive 3 year periods and ranked them. We then calculated the correlation between these ranks. Two specific results present important lessons for investors who tend to invest in the best performing fund.
1.The best performing scheme of one 3 year period, say 2014-16 was ranked as low as 223rd in the subsequent 3 year period – 2017-19.
2.The negative and low correlation between the ranks for different 3 year periods indicate that choosing the best performing scheme cannot guarantee superior long term performance.
Like in cricket, recency bias in investing leads investors to extrapolate patterns and make projections based on near term performance. Funds that have delivered spectacular returns in the recent past appear unduly attractive. A better approach would be to first choose a mutual fund house with a defined investment philosophy, stick to asset allocation and evaluate the long term track record.
*Data points sourced from Cricket365, Skysports.com, www.thehundred.com, Guardian and other publicly available sources.
Disclaimer: This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on dates mentioned. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
