Hindsight bias

Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination to see events that have already occurred as being more predictable than they were before they took place. It is a multifaceted phenomenon that can affect different stages of designs, processes, contexts, and situations. Hindsight bias may cause memory distortion, where the recollection and reconstruction of content can lead to false theoretical outcomes.

We tend to look at history and think of it linearly. That is even truer for financial history. In short, many experts and gurus use models based on historical patterns to make business decisions. There is one huge issue with that. The past is explainable just in hindsight. Think about what you’ve done today. On the many actions you’ve taken, those could have happened in a multitude of small variations.

Those small changes combined influence how your day unravels. In other words, when we go from now to then, the future can evolve in a plethora of ways. Yet when we look at the past, we see only one possible outcome. Thus, we have the illusion that history could have happened in only a way. But that is only illusory, as it could have occurred in zillions different ways.

Based on that, next time you’re about to make a prediction, based on the past. Keep that in mind. Knowing history doesn’t make you better at predicting the future. Quite the opposite. You have to remember that history is only one of the possible patterns.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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