hindsight-bias

What Is Hindsight Bias? The Hindsight Bias In A Nutshell

Business / By / December 16, 2021

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:

  1. 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.
  2. 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.
  3. 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.

Key takeaways:

  • 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

heuristic
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
recognition-heuristic
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
representativeness-heuristic
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
take-the-best-heuristic
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman since 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
bundling-bias
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
barnum-effect
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
nudge-theory
Nudge theory argues positive reinforcement and indirect suggestion is an effective way to influence the behavior and decision making of individuals or groups. Nudge theory was an idea first popularized by behavioral economist Richard Thaler and political scientist Cass Sunstein. However, the pair based much of their theory on heuristic research conducted by psychologists Daniel Kahneman and Amos Tversky in the 1970s.
bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.
einstellung-effect
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

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