Polls / May 21, 2012

Do you know what "hindsight bias" is and how it relates to investing?

Respondents to the latest eZonomics online poll are split on if they know what the “hindsight bias” is and how it relates to investing. Overall, 58% say they do.

Look back
It’s often easier to see why a situation occurred after it has actually happened.
Think of the telltale signs trouble was looming before the global financial crisis. Are they much more obvious now it has happened?
Hindsight bias happens in other parts of life too. Perhaps a new artist has catapulted to number one with catchy song – and the early signs of their superstar talent are much easier to see now they topped the charts. Or two of your friends seem like a perfect match together now that they have become engaged (even though you never thought it would last when they first united).
Looking back can bring a new perspective. As the saying goes, “hindsight can be a wonderful thing”.

Don’t underestimate uncertainty
Hindsight can, however, be dangerous in investing. As an earlier article explains, hindsight bias can skew reality and make the world seem more predictable than it actually is. It can encourage us to underestimate uncertainty – a very important part of weighing financial risk in investments.
Take the global financial crisis. An earlier eZonomics poll asked respondents if they felt as if the global financial crisis was predictable. Overall, 73% either said it was or they were not sure if it was. This could demonstrate hindsight bias. After all, if the crisis was so obvious, why did so many people get caught out?

Keep a diary
As an eZonomics poll on taking money advice from parents and grandparents warns, it’s possible to inadvertently “hand down” hindsight bias from generation to generation. Relatives may look back and believe investing success was due to deliberate choices whereas, in truth, luck and general economic conditions favoured them. This example shows why seeking a wide range of sources of financial wisdom can be important.
Keeping a diary of investing choices and financial conditions may also help counter hindsight bias. Seeing information in black and white could provide a more objective record as well as protect against the tendency to put a rosy glow on memories and block out times when investments turned sour.

Investing

eZonomics team
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