People Overreact to News both Good and Bad

When we are asked to recall a list of items in any order (free recall), we tend to begin recall with the end of the list, recalling those items best (the “recency effect”).



People tend to place far too much emphasis on recently announced “news.” Rather than placing the appropriate emphasis on more salient but “distant” information, we emphasize what we can recall and the easier it is to recall (some might say “fresher or vivid in our minds”) the more importance we place on that information.


The foregoing phenomenon helps explain the sudden swings in our financial markets.