In a new article in the September 2012 issue of Perspectives on Psychological Science, a journal of the Association for Psychological Science, psychological scientists Neal Roese of the Kellogg School of Management at Northwestern University and Kathleen Vohs of the Carlson School of Management at the University of Minnesota review the existing research on hindsight bias, exploring the various factors that make us so susceptible to the phenomenon and identifying a few ways we might be able to combat it. The phenomenon, which researchers refer to as “hindsight bias,” is one of the most widely studied decision traps and has been documented in various domains, including medical diagnoses, accounting and auditing decisions, athletic competition, and political strategy. The problem is that too often we actually didn’t know it all along, we only feel as though we did. The situation may be different each time, but we hear ourselves say it over and over again: “I knew it all along.”
The guy in accounting who was secretly embezzling company funds. The tumor that appeared on a second scan. In addition, this also rationalizes investments better as it would help keep our emotions out and our confidence in check keeping them grounded.The fourth-quarter comeback to win the game. This would also help the investor learn from both his mistakes and his successful investments. Here the investor should map all the investment decisions, the reasons behind these decisions, and their respective outcomes. Investors can maintain an investment diary. Envisioning the negative also helps us plan for the unexpected. Researchers Roese and Vohs suggested that in order to counteract this bias one may consider mentally reviewing potential negative outcomes as well which would allow people to gain a more balanced view. Generally, when we are looking at a favorable future we look for information that fits this narrative. Investors with hindsight bias already look at the profitable future they may have based on their decisions. Envision both the best and worst possibilities. Based on these the investor may go ahead and take the most appropriate decision. Sticking to objective analysis presents the investors with the pros and cons. Investors can avoid being trapped by their own psyche by following some simple remedies: 1. Also they often only remember the big unexpected event that led to the outcome the last time and not the multiple small events that affected the outcome in other instances. This is flawed as firstly their decisions are not backed by research. Investors with hindsight bias often look for the expected outcome in any decision they take.Phrases like ” It was meant to happen” are often thrown around.These investors also at times go ahead and label others who may have made unsuccessful decisions. Investors who possess this bias constantly blame their advisors or investment managers for losses but when it comes to trades where they make profits they feel entitled to the praise.This clouds their decision making which eventually leads them to take up riskier decisions. They generally overestimate their intelligence.Following are some of the traits of investors who may suffer from this bias This may encourage them to take up unnecessary risks in the future which may be destructive for the investor. It may lead to them being overconfident with the belief that they possess foresight or intuition. This can be dangerous as even if they might be right due to luck they may go on believing that they earned that success. This is particularly dangerous because if similar patterns repeat themselves in the future they make take decisions based on their faulty predictions which are not backed by research. In adverse conditions when their stock investment may have declined they may even look back and convince themselves that they saw it coming. This further pressures them to accurately time stocks always. This is because missing potential purchases or making bad stock investments generally involves sacrificing years of accumulated wealth. Investors are put in a pressured environment when surrounded by stocks. Hindsight bias has the ability to affect our investment decisions just as the bias would affect our predictions in other aspects be it cricket matches etc.