The World Economic Forum’s Recency Bias: Are We Prepared for the Unexpected?
A closer look at the annual report on extreme global risks and the tendency to focus on past challenges rather than future uncertainties.
The World Economic Forum (WEF) in Davos, Switzerland, is a gathering of the world’s most influential thought leaders, where they discuss pressing global issues and risks. As part of this event, the WEF releases an annual report on extreme global risks, based on interviews and surveys with experts from various fields. However, a closer look at these reports reveals a recurring pattern: the risks considered most urgent often reflect what has already happened. This phenomenon, known as recency bias, raises questions about our preparedness for the unexpected and the effectiveness of our risk assessment strategies.
The Cost of Living Crisis: A Case of Hindsight Bias
In the previous year’s report, the top risk for impact and severity over the subsequent two-year horizon was the “cost of living crisis.” This concern stemmed from the high inflation rates experienced in the United States and other countries. However, it is worth noting that this worry only emerged after inflation had already reached alarming levels. The hindsight bias demonstrated by global thought leaders highlights the need for a more proactive approach to identifying and addressing risks.
Infectious Diseases: An Unforeseen Priority
The 2021 Global Risks Report saw “infectious diseases” rise to the top of the ranking, following the devastating impact of the Covid-19 pandemic. Surprisingly, in the previous year’s report, it was ranked in 10th place. This shift in priorities underscores the challenges of anticipating and adequately preparing for unforeseen global health crises. It also highlights the need for a more comprehensive and adaptable risk assessment framework.
Asset Price Collapse: Learning from History
In the aftermath of the 2008 financial crisis, the 2009 report identified “Asset Price Collapse” as the highest-ranked risk. However, in subsequent reports, this risk gradually lost its prominence, despite the stock and bond markets being more overvalued than ever. This example showcases the importance of learning from historical events and not underestimating the potential for recurring risks. By understanding the lessons of the past, we can better navigate the uncertainties of the future.
Overcoming Recency Bias: Embracing Historical Perspective
Recency bias, the tendency to give more weight to recent events, is a universal human tendency. To overcome this bias, we must become better students of history and recognize that events from the past can be just as relevant as recent occurrences. By adopting a more balanced perspective, we can avoid the trap of believing that “this time is different,” which often leads to costly mistakes in financial decision-making.
The Challenge of Market Timing and Reactive Behavior
Attempting to time the stock market based on unexpected events is a challenging endeavor. Markets react swiftly to new information, leaving individual investors at a disadvantage if they are constantly reacting rather than planning ahead. A well-thought-out financial plan that considers a range of potential outcomes can help mitigate the risks associated with reactive behavior, such as buying high and selling low.
Conclusion:
The World Economic Forum’s annual report on extreme global risks provides valuable insights into the concerns of thought leaders. However, the recurring pattern of focusing on past challenges rather than future uncertainties raises questions about our ability to anticipate and prepare for the unexpected. Overcoming recency bias and embracing a historical perspective can help us develop more effective risk assessment strategies. By acknowledging the limitations of our knowledge and learning from the lessons of the past, we can navigate the complexities of the global landscape with greater resilience and foresight.