A Caution on Hindsight Bias

We often rely on hindsight as a guide in striving to improve ourselves. We investigate our past experiences, decisions, and subsequent outcomes to help us construct a better future. Hindsight, the ability to explain and understand past events, plays a significant role in shaping our behaviour toward personal financial decisions. It’s particularly prevalent with investing decisions. However, it may lead to false confidence in our ability to predict outcomes and gives us the illusion that things make sense, even when they do not.?

Hindsight Bias

Good decision-making entails realistic evaluations of the risks in our decisions, and ignoring this reality affects our ability to predict results. Instead, hindsight bias blinds you from genuinely comprehending the impact of your choices and experiences, whether in finance or personal life. It causes us to become less accountable for our decisions, less critical of ourselves, and over-confident in our ability to make decisions.

Financially, hindsight bias deforms our mental records and perception of past events. For instance, you predicted that investing in company stock or increasing your risk exposure based on past events was appropriate for your financial future. Unfortunately, the strategy implemented turned out to be unsuccessful.?

While assessing the outcome of that past decision and being exposed to newer information, you ultimately concluded that the financial consequences were inevitable. Hindsight bias happens when you view the event as inevitable instead of realistically evaluating it based on the set of parameters available to you at the time of your decision-making. As a result, you become overly confident in your ability to foresee future outcomes leading to more risky decisions.?

The bottom line is that hindsight bias impedes us from clearly learning from our experiences.

Offsetting the Bias

It’s not easy to offset this bias, but there are several ways to do it.

• Decision Journal: Write down your thought process, particularly for decisions with significant financial impact. This avoids any distortions in your mental track record, preventing you from being overly confident.
• Review Alternatives: Spend time to reflect on how specific outcomes that did not happen could have unfolded. By going through this mental exercise, we offer ourselves a chance to construct a more balanced perspective to the conclusion of an outcome being inevitable.

Hindsight bias is a common phenomenon, yet it is tricky to know when you succumb to it. To minimize lapses in financial judgment, refer to your decision journal.

Enjoy!

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