Behavioral Finance and Your Portfolio

8Belief Perseverance Bias #6: Hindsight Bias

Hindsight is a wonderful thing.

—David Beckham

Bias Description

Bias Name: Hindsight bias

Bias Type: Cognitive

Subtype: Belief perseverance

General Description

Described in simple terms, hindsight bias is the impulse that insists: “I knew it all along!” This is perhaps the most pronounced version of belief perseverance biases. Once an event has elapsed, people afflicted with hindsight bias tend to perceive that the event was predictable—even if it wasn't. This behavior is precipitated by the fact that actual outcomes are more readily grasped by people's minds than the infinite array of outcomes that could have but didn't materialize. Therefore, people tend to overestimate the accuracy of their own predictions. This is not to say, obviously, that people cannot make accurate predictions, but merely that people may believe that they made an accurate prediction in hindsight. Hindsight bias has been demonstrated in experiments involving investing—a few of which will be examined shortly—as well as in other diverse settings, ranging from politics to medicine. Unpredictable developments bother people, since it's always embarrassing to be caught off guard. Also, people tend to remember their own predictions of the future as more accurate than they actually were because they are biased by having knowledge of what actually happened. To alleviate the discomfort associated with the unexpected, people tend to view things that have already ...