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.
The past seems linear, but the present is not!
A key thing to understand is when we look at past events; they seem to follow a linear logic.
In hindsight, it’s very easy to discern, among the many small and larger events, which ones do play a key role in shaping the future.
Yet, when those events happen, at the moment, it might be very hard to understand the long-term consequences of those.
And even if we do have an understanding of that, the context might be so strong that events seem to be shaped no matter what.
And then, of course, individuals with their decisions also impact that.
Thus, if the past seems to follow a straight line.
Instead, the present is quite hard to dissect because it might take many shapes and paths simultaneously.
Some trends, for instance, might be stronger in certain time periods than others, but the world also moves in unexpected directions.
Thus, trends that none expected to end up either take much, much longer to consolidate, or much less to become a new reality!
Take the case of an analyst who looks at the past and concludes that a company failed for specific reasons related to the founder or team.
Yet, it turns out the timing might have been the main failing factor.
Correlation vs. causation
Another confusion is between correlation vs. causation.
With correlation, many believe that they can find hidden patterns everywhere.
You take an event from the past, attach to it a couple of variables that seemed to move in the same direction, and you get correlation!
But while this seems to make sense, it often leads to complete failure to really understand the past.
Take the case of when a personal trait is analyzed as the main predictor of success.
Things like “successful CEOs sleep eight hours a night” or “successful entrepreneurs wake up early in the morning.”
Those are some of the many traps that we fall into!
What causes hindsight bias?
Hindsight bias is caused by three main variables, or 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.
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.
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:
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.
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.
Connected Thinking Frameworks
Convergent vs. Divergent Thinking
Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.
Main Free Guides: