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Hindsight Bias

Hindsight bias is often known as the I knew it all along phenomenon. It is fundamentally a memory distortion that allows us to craft a narrative that there were obvious data points that pointed to a particular outcome. When in reality the data points were not clear or were mixed with a vast amount of competing data that pointed to alternate outcomes. We also incorporate new information that was not available in the past. 


Hindsight bias makes past events look more predictable than they were. It is not uncommon to hear people proclaim, “The housing market was so obviously overheated in 2007.” In reality, the Great Recession was a complex series of interrelated issues including weaknesses in the financial system, leverage, excessive risk taking, and multiple triggering events. Very few people correctly identified what was transpiring ahead of time, and those who were vocal about their views were dismissed.

More importantly, the fact that past events appear to be predictable, deludes us into thinking that future events are more predictable than they really are. This feeds investor overconfidence, which can lead to excessive risk taking or unnecessary hedging (i.e. an investor is convinced the market will crash). 


Hindsight bias makes the past look more predictable than it really was. In investment management, investors should rely on data and not on narratives. With personal investments, it is useful to keep a diary of your thoughts and rationale around an investment. That way you have a clear picture of market conditions, and all the considerations associated with an investment decision. While hindsight bias does not have a first order impact, it feeds overconfidence which can result in less-than-optimal decision making. 

This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.

LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.