Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Understanding hindsight bias
Before the event takes place, someone may predict an outcome with an educated guess – but there is no way of knowing for certain what will transpire. After the event occurs, the same person may convince themselves they knew what was going to happen before it happened. This is why the hindsight bias is often called the “I knew it all along” phenomenon.
Under the assumption of being able to predict the future, hindsight bias causes overconfidence in the individual and they become less critical of their decisions as a consequence. Ultimately, this leads to poor decision-making.
What causes hindsight bias?
Hindsight bias is caused by three main variables, or inputs:
- Cognitive inputs – some people remember an earlier prediction about an event with distorted or fabricated memories. In the process, they may find it easier to recall information consistent with their current knowledge and construct a narrative that makes sense.
- Motivational inputs – others believe the world is a predictable place and that event outcomes are predictable and inevitable. They take comfort in this belief and consider it to be infallible.
- Metacognitive inputs – when an individual can explain how and why an event happened, they are more likely to believe the outcome was easily foreseeable.
Hindsight bias in business
Hindsight bias can be seen in the following business scenarios:
- Investing – when an investor purchases shares and sells them for a profit, the decision will appear obvious and the investor may congratulate themselves. When share prices decline, many investors claim they had been expecting a negative trend for some time despite not hedging against it.
- Marketing and sales – the internal development of marketing and sales campaigns should also consider hindsight bias because it plays a critical role in responsible and accountable decision making. This culture is important in predicting market trends, developing the right communication strategy, and implementing the best crisis management plan.
- Accounting – auditors in accounting firms are often blamed in hindsight for failing to foresee and anticipate the financial problems of their clients. Studies have shown that hindsight bias influences several key auditing processes, including audit opinion decisions, going concern judgments, and internal control evaluations.
- Hindsight bias is the tendency for an individual to convince themselves that they accurately predicted an event before it happened. The phenomenon causes overconfidence and the individual becomes less critical of their decisions as a result.
- Hindsight bias is caused by three variables, or inputs. These include cognitive inputs, motivational inputs, and metacognitive inputs.
- In business, hindsight bias can at least partly explain the behavior of investors and traders. The effect also occurs during sales and marketing decision-making and in the accounting industry.
Related Business Concepts
Main Free Guides: