In this column I explore new research from The Quarterly Journal of Economics that shows just how unreliable our memories of past market performance really are. Most of us, even seasoned investors, misremember what our portfolios earned or how markets behaved over longer stretches. The danger is that these distorted memories become the foundation for our expectations about the future. When markets rise, we recall past good times and imagine more of them ahead. When markets fall, our recollections skew toward panic and past losses. The study found that recalled returns, not actual returns, were more predictive of how people traded. That cue–recall–simulation loop shapes forecasts in ways that feel intuitive but are often harmful.
I also look at how this bias affects different types of investors. Active traders are swimming in cues every day, but even buy-and-hold indexers can let emotional memories influence contribution timing, rebalancing or decisions to pause a plan. The antidote I suggest is surprisingly simple. Keep a brief journal each year that captures what you were thinking and feeling during major market moments. Over time, that written record gives you a more accurate anchor than whatever your brain decides to reconstruct. It helps balance the dramatic highs and lows with the long, boring stretches in between that actually drive long-term wealth. If you do not write down your financial history, your brain will rewrite it for you.
Preet Banerjee
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