hindsight-bias

What Is Hindsight Bias? The Hindsight Bias In A Nutshell

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:

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.

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.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

convergent-vs-divergent-thinking
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

critical-thinking
Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.

Systems Thinking

systems-thinking
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

vertical-thinking
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Maslow’s Hammer

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).

Peter Principle

peter-principle
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

straw-man-fallacy
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Streisand Effect

streisand-effect
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.

Heuristic

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

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

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

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

biases
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.

Bundling Bias

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

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.

First-Principles Thinking

first-principles-thinking
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.

Ladder Of Inference

ladder-of-inference
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.

Six Thinking Hats Model

six-thinking-hats-model
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

second-order-thinking
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

lateral-thinking
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.

Bounded Rationality

bounded-rationality
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.

Dunning-Kruger Effect

dunning-kruger-effect
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

occams-razor
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.

Mandela Effect

mandela-effect
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.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
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 in marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger EffectLindy EffectCrowding Out EffectBandwagon Effect.

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