Let us not look back in anger, nor forward in fear, but around us in awarenessJames Thurber
Hindsight bias is the characteristic of investors, when looking back, seeing events that took place in the past as having been more predictable than they seemed before they happened.
Likewise, things that didn’t happen seem, with hindsight, much less likely to have happened than they did beforehand. In other words, there is a reconciliation of a person’s beliefs based on the outcome of events.
When looking back, seeing events that took place in the past as having been more predictable…
For example, if a financial professional recommends a financial plan or portfolio that does well, an investor tends to think of that recommendation as one he or she liked from the start, even if that was not the case. With recommendations that do not turn out well, however, the investor may think that he or she had doubts to begin with about the recommendation, even when, in fact, that was not true. This thinking results in a person giving less credit to the good recommendations and more blame for recommendations that do not work out.
The stock market sell-off in 2008 can be seen as a classic example of Hindsight Bias.
Looking back one might think they should have been able to tell that the market was going to correct dramatically because of the subprime market and decline in real estate prices. But how was one to know the extent of the sell-off and how long it would last? How could one have predicted the credit crunch and subsequent government bailouts? Everything is always clearer in the rearview mirror.
Next. Read about Money Behavioral Mistake #3. Fear of Regret.