Hindsight bias is the misconception, after the fact, that one “always knew” that they were right. Someone may also mistakenly assume that they possessed special insight or talent in predicting an outcome. This bias is an important concept in behavioral finance theory.
Hindsight Bias Example
Consider the 2008 financial crisis or the dotcom bubble of the late 1990s. If you talk to many people now, they may state that all the signs were there and everyone knew it was coming. However, if you examine the history, you learn that analysts or investment professionals who were screaming that there was a problem at the time weren’t listened to, in fact, they were laughed at and investors largely ignored their warnings.
In the other behavioral finance articles, we’ve talked about the need to keep an investment diary. We need to map the outcomes of our decisions and the reasons behind those decisions to learn from both our wins and our losses. An investment diary also helps mitigate against the bias of self-deception, which again limits our ability to learn.
Hindsight bias prevents us from recognizing and learning from our mistakes. We talk about it as a limit to our learning because we tend to believe after the fact that we knew about something all along.
So, how do we guard against this bias? An investment diary, comparing outcomes to the reasoning behind our investment decisions, is a good way to keep this hindsight bias in check.
Thank you for reading this CFI explanation of hindsight bias in finance. To learn more, check out CFI’s Behavioral Finance Course. To keep learning and advancing your career, these additional resources can be helpful: