What is Hindsight Bias?

Hindsight bias is a psychological concept often studied in behavioral economics where people believe they accurately judged an outcome before it happened. As a result, they then believe they can foresee future events because of that prediction. Believing they can predict the future can be a way to maintain a feeling of control over life and its often unpredictable events.

How Hindsight Bias Works

When people make statements like, ‘I knew that would happen’, and ‘I called it’ after an event takes place, those are examples of hindsight bias. The danger with people claiming they predicted future events is that they let this belief guide their decision making in the future. It can also mean individuals take less time to vet their decisions before making them since they feel the future is predictable. How it usually happens is when we’re faced with a decision, we recall a prediction we made in the past and make future decisions based on that. Hindsight bias can impact people’s beliefs and behaviors and sometimes, for the worst.

Causes of Hindsight Bias

There are three main causes of hindsight bias according to researchers. They include cognitive, metacognitive and motivational variables.

• Cognitive: Not everyone accurately remembers their past predictions as an event. That means sometimes people may claim they called an event beforehand even if that’s not the case.
• Metacognitive: This relates to being able to make logical sense of an event. When it’s easy to understand why an event happened, some people find it more predictable.
• Motivational: The world can be complicated and difficult to understand. However, if people feel they can predict outcomes, that can create a sense of safety and security.

Examples of Hindsight Bias

There are several examples of hindsight bias present in our everyday lives. One may be having a feeling that the market is going to take a nosedive due to news of a storm. If after the storm, the stock market does experience some turbulence, you may experience hindsight bias moving forward. Next time there is a storm warning, you could make decisions about what to do with your investments based on your belief that the stock market is going to fluctuate because of the coming storm, even though the last storm actually had no influence on the market. The problem with using hindsight bias in this way is that the past isn’t always an accurate predictor of the future.

Another example of hindsight bias is forecasting a football team you love is going to win a game. If they do with the game, hindsight bias could be at play. This could lead a sports fan to bet on future games. As with any form of betting, it can be a humbling experience when the bet is wrong and you’re reminded that nobody can 100% predict the future.

Hindsight Bias and Investing

Investors sometimes rely on hindsight bias to make decisions about what stocks to buy and when to sell. This can often lead to pressure, which comes from the desire to make investing decisions that yield positive results. When an investor’s strategy doesn’t go so well they may lean on hindsight bias to explain why they got the outcome they did. For instance they may claim to have had a feeling their trade wouldn’t go right and regret not doing the opposite. That could then turn into a belief about certain investing strategies and lead to behavior that influences how they trade in the future. Seeing as it’s almost impossible to consistently predict the market, hindsight bias can negatively impact a portfolio.

To prevent hindsight bias, it’s important to brainstorm multiple potential outcomes versus relying on past ones. You may also log past results so you have a tangible record of past outcomes and can make informed decisions moving forward. Logging results is also a way to identify patterns and analyze results.