Hindsight Bias: Why You Think You 'Knew It All Along'

Have you ever looked back at a stock market crash or a big rally and thought, “I knew this would happen”? You may believe that you had predicted the outcome, but this is usually not true. This experience is called hindsight bias. It’s a common thinking error that affects both new and seasoned investors.

Let’s understand why the hindsight bias occurs, and how you can avoid it when evaluating your investment decisions.

• Table of contents

• Why we misremember our market predictions
• How this bias impacts decision-making
• Using investing journals and frameworks

Why we misremember our market predictions

Hindsight bias is when we believe we predicted an outcome, after it has already happened. This bias tricks our memory. We start thinking we “knew it all along”, even if our original view was very different.

Some reasons why it happens:

• Our brains love stories: When something happens, we want to make sense of it. So we create a story that fits the outcome and forget other possibilities we had once considered.
• We want to feel smart: It feels good to believe we saw it coming. It makes us feel more confident, even if the belief isn’t accurate.
• We forget what we actually thought: Without a written record, we often don’t remember what we believed at the time. Over time, our memories get reshaped.

This bias typically shows up especially after big market moves. After a stock market crash, many people claim that it was always obvious. But it probably wasn’t obvious. Hindsight makes us forget the uncertainty we felt before the event.

Read Also: Availability Bias in Investing Explained

How this bias impacts decision-making

Hindsight bias can lead to many investing mistakes that can be avoided. When we believe we predicted the past correctly, we become overconfident about predicting the future.

Hindsight bias can affect us in many ways:

• Overconfidence: If you believe you predicted the last crash or boom, you might take more risks, believing that you have special insight.
• Ignoring luck: You might forget that some of your past gains were due to luck, not skill.
• Poor learning: If you believe you already “knew it”, you may not go back and study what actually happened, which keeps you from learning from stock market crashes and mistakes.
• Repeated errors: When you don’t learn from the past honestly, you might keep making the same investing mistakes again and again.

Being aware of hindsight bias can help you stop it from clouding your judgement.

Read Also: 5 Significances of Behavioural Biases in Decision Making

Using investing journals and frameworks

You can protect yourself from this bias by using one of the simplest and most powerful tools, which is an investing journal. This is where you write down your thinking before making an investment decision.

Include the following pointers in your journal:

• Your reason for buying or selling a stock.
• The possible outcomes (both good and bad) you’re considering.
• Your current view or mood about the market.
• Your short-term or long-term expectations for how things might unfold.

When you look back later, you’ll have a clear, honest record. You won’t be guessing what you thought. This helps in learning from past decisions, whether they turned out well or not.

You can also create a simple investment framework. Here’s a checklist or set of rules you can follow every time you make a decision:

• Valuation checks: Is this stock priced fairly?
• Business quality: Is this a strong, stable company?
• Risk assessment: What can go wrong?
• Time horizon: Am I ready to hold this investment for years?

Frameworks help you stay calm and consistent. They reduce the chances of emotional decisions, especially during market ups and downs.

Read Also: Confirmation Bias: Behavioural Finance and Mutual Funds

Conclusion

Hindsight bias makes us believe we were smarter than we actually were. Good investing is not about guessing the future correctly, but about being open to learning. By using tools like journals and frameworks, you can guard against this bias and avoid many common investor mistakes. You’ll also be more open to learning from stock market crashes, instead of simply reacting to them. Understanding your own biases is one of the most important skills in investing. It separates guesswork from wisdom and helps you improve your investment decisions over the long run.

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