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.
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 communicationstrategy, and implementing the best crisis managementplan.
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 accountingindustry.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 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.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.
Gennaro is the creator of FourWeekMBA, which reached about three million business students, executives, and aspiring entrepreneurs in 2021 alone | He is also Head of Enterprise Sales for a high-tech startup, which he helped grow at a double-digit rate since the onset | In 2012 Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
