Hindsight Bias

Reviewed by Bhavana | Updated on Sep 30, 2020

Meaning of Hindsight Bias

Hindsight bias is a psychological phenomenon where people will tend to overestimate their own capacity to predict an outcome they would not have been able to predict before an event occurred. Hindsight bias can lead a person to believe an event is more predictable than it actually was, and oversimplification in effect and cause could be the outcome. Hindsight bias is studied as a subject which is part of behavioural economics.

Hindsight bias is a common occurrence in the field of investment, as the timing pressure to buy securities for maximizing returns can often lead to investors regretting not noticing the trends earlier.

What is the Role of Hindsight Bias

This phenomenon originates from psychology but also plays a vital role in behavioural economics. Hindsight bias in investing can manifest as a sense of frustration or regret at not having predicted a trend in security or the overall market.

Hindsight bias refers to an individual's tendency to believe he or she could have predicted a preceding outcome accurately, even though that person was unable to do so in real-time.

Investors should be careful when assessing how past events affect the current market, particularly when considering their own ability to predict how current events will impact future securities performance. Believing that one can predict future outcomes can lead to overconfidence, and overconfidence can lead to stocks being selected for personal reasons, not because of their financial performances.

Impact of Hindsight Bias

Hindsight bias is also termed as the creeping determinism or the knew-it-all-along phenomenon. Examples of this phenomenon can be noticed in the historian writings who have described the outcomes from battles, physicians who have recalled their clinical trials, and also in judicial systems as people who attribute responsibility based on the supposed predictability of accidents.

Hindsight bias could result in distortions of memories of what was known and/or believed prior to an occurrence of an event and is a vital source of overconfidence concerned to the ability to foresee the outcome of futuristic events.

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