Hindsight Bias: Beware Those Who Were Right All Along

Hindsight bias suggests that with the passing of time we are likely to see our predictions more favourably. Here’s how to avoid this trap.

You’ve been lied to. Time and time again. And so compelling is the story you’ve told yourself, you’re unlikely to even be aware of it – or to accept it.

Granted, that’s quite an opening accusation. But before you click the close button five sentences in, let’s go back a few steps to this accusation’s root.

Your Our lies are born out of an overwhelming desire to be right. And these lies are supported by a selective and somewhat shoddy memory.

Working in toxic tandem, our desire to prove ourselves right and our imperfect memory bring about what psychologists call hindsight bias.

What Is Hindsight Bias?

Hindsight bias is our tendency to perceive events that already happened as having been more predictable than they really were.

Researchers have demonstrated this effect across investment, politics, terrorism, criminal law, you name it. It’s a bias that is pervasive in day-to-day life.

In a review of the existing research in 2012, Neal Roese and Kathleen Vohs suggest hindsight bias can be placed into three layers:

  • Layer 1: Memory Distortion. This is where we misremember a previous prediction or judgement. It’s where, for example, when faced with a rallying stock market, those who said stocks would continue tumbling begin to remember their predictions differently in a desperate will to be right.
  • Layer 2: Inevitability. This is where we deem a past event to have been inevitable. It’s that global pandemic that until March 2020 most of us had never given more than 5 minutes of thought, and yet now universally deem to have been inevitable.
  • Layer 3: Foreseeability. This is where we personally believe we could have foreseen the event. It’s those who call the recession after it has happened, even though they didn’t have the foggiest.

In practice, it’s not difficult to think of examples where we might fit the above profile. The global pandemic, the asset bubble bursting, the friend’s relationship that ended, the company restructuring, the colleague’s breakdown, the stock market rally, the rise of bitcoin, the accounting fraud, the elected President, the subprime mortgage crisis. We appraise these things in the fullness of time, and all too often utter those misguided words that we “knew it all along”.

But our desire to “know it all along” presents some serious problems.

The Problems with Hindsight Bias

#1: We don’t learn from mistakes. When we give up reality in favour of convincing ourselves we were right, we blind ourselves to the lessons of our mistakes.

#2: We become overconfident. As we place misguided confidence in our prior predictive abilities, we carry forward misguided excess confidence to our future predictive abilities. As a result, we start to recalibrate our risk tolerance to our own disadvantage.

#3: We oversimplify and ignore the nuances of forecasting. Because we’ve convinced ourselves we got it right, perhaps via simplified means, we assume future forecasting is just as simple. In other words, we assume our predictive model works, ignoring all the exogenous variables that determined the previous outcome in the first place.

The costs of these problems are immeasurable, spanning all aspects of our lives from the financial to the physical to the relational.

How to Avoid Hindsight Bias

It goes without saying, then, that we should train ourselves to avoid hindsight bias. And first and foremost, that journey requires us to put our pride to one side.

#1: Accept it’s fine to be wrong. Hindsight bias is basically a retrospective form of confirmation bias, where we mentally seek and edit past views to support our present view. The bottom line is we are doing that because we hate the idea of having been wrong. But this editing of history is the antithesis of self-improvement. Ultimately, we can only beat hindsight bias if we are capable of recognising when we were wrong.

#2: Track your decisions and forecasts. Recognising our mistakes in the fullness of time is a lot easier if we keep a record. Writing down our big predictions is a useful way of countering hindsight bias. Not only does it negate the possibility of memory distortion, but it is also forces us to ask ourselves how accurate our predictions were in the first place. The result is that we can keep misplaced confidence about our predictive abilities in check.

#3: Consider alternatives and opposites. We needn’t limit this exercise to exclusively reviewing our original predictions. Psychologists recommend also explaining outcomes that didn’t happen. This allows us to reach a more nuanced understanding of the many variables that determined the final outcome.

#4: Know that even a broken clock is right twice per day. Take a look around in the media and it won’t take long to identify non-committal predictions that are designed to eventually be proven right. If you predict a deep recession for long enough, eventually you will be right. If you predict a world war for long enough, unfortunately the chances are that you will also eventually be proven right. But it doesn’t make this a good prediction. It doesn’t justify carrying forward excess confidence from it for our future predictive abilities.

#5: Recognise that surprises happen. If you’ve not got the memo yet, the world isn’t all that predictable. We are irrational and so are the institutions and individuals that impact our lives the most. Some things therefore just aren’t worth trying to predict with accuracy in the first place. In such cases, we are better off taking decisions based on the historical context rather than trying to predict exactly how bad or good circumstances might get.

Embrace Wrong in Hindsight

Over the last few months, I’ve thought a lot about hindsight bias. I’ve been proven wrong on multiple occasions on the financial markets and on the small matter of the ongoing health crisis.

It would be easy to look back on those predictions and try to water them down. “What I meant was x…”, “We are still expecting y…”, “What I actually predicted was z…”

Or I can take things on the chin and learn. Because there are always lessons to be learnt in the face of wrong predictions.

Perhaps the biggest indignity of hindsight bias – bigger than trying to retrospectively prove ourselves right – is missing out on the lessons from being wrong.

Time will tell where future events take us, but if you take one thing from this article, make it this: embrace wrong in hindsight. You will learn far more in the future as a result.

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