Hindsight is a dangerous thing
The saying goes that “hindsight is a wonderful thing” – this is often because circumstances are clearer when we are looking back and know the eventual outcome. But when it comes to investing, hindsight can be a dangerous thing, particularly if investors fall into the hindsight bias thinking trap.
It’s so obvious now
Our What is … hindsight bias article tells how the bias can skew reality and make the world seem more predictable than it actually is. It can see us underestimate uncertainty – which is highly relevant for investing decisions about risk and other factors.
Once something has happened, we often feel as if the situation is more predictable than before. As if we “knew it all along”. But if the global financial crisis was so predictable, why did so many people get caught out so badly? The reasons are complex however it might be that hindsight bias is making it seem now like the crisis was more predictable.
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 to the next 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.
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