![]() To learn more, check out CFI’s Behavioral Finance Course. Thank you for reading this CFI explanation of hindsight bias in finance. It means when an event occurs, we often have the impression that it was. The hindsight bias is also known as I knew it all along, or I knew it was going to happen, a phenomenon. 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. Hindsight is the tendency to think that we knew some event was likely to occur even before we learned that it had in fact taken place. 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. Hindsight bias prevents us from recognizing and learning from our mistakes. ![]() In particular, once people know the outcome. An investment diary also helps mitigate against the bias of self-deception, which again limits our ability to learn. Recollection or reevaluation of past events can be affected by what has happened since. We need to map the outcomes of our decisions and the reasons behind those decisions to learn from both our wins and our losses. In the other behavioral finance articles, we’ve talked about the need to keep an investment diary. Learn more in CFI’s Behavioral Finance Course. 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. If you talk to many people now, they may state that all the signs were there and everyone knew it was coming. ![]() This bias is an important concept in behavioral finance theory.Ĭonsider the 2008 financial crisis or the dotcom bubble of the late 1990s. ![]() Someone may also mistakenly assume that they possessed special insight or talent in predicting an outcome. Hindsight bias is the misconception, after the fact, that one “always knew” that they were right. ![]()
0 Comments
Leave a Reply. |