Money Behavioral Mistake #4 Hindsight Bias

Hindsight bias. Back view of young woman enjoying beautiful seascape in Italy.
Please follow and like us:

Let us not look back in anger, nor forward in fear, but around us in awareness

James 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.

Hindsight Bias. Rear view shot of attractive young woman sitting on back of her boyfriend riding bike through village road.

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.

Hindsight Bias. Looking at the road behind you from the front mirror.

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.

Book a Financial Therapy session now.

Please follow and like us:

You Might Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *