How many of you knew that the Boston Celtics would win the NBA Finals?  Or that Tiger would win the U.S. Open?  Well how sure were you last week?

Or… you’re sitting at a Blackjack table in Las Vegas with a 7 and 5, the dreaded 12.  Do you stay or hit?
Stay: Dealer flips over and has a 15.  “Man, I KNEW I should have hit”
Hit: You get a King.  Bust.  “Man, I KNEW I should have stayed”

Hindsight bias describes our inclination to see events in the past as more predictable than before the event took place.  When our predictions turn out correct, we tend to remember those predictions to be much stronger than than they actual were.  Self proclaimed as the “I knew it!” syndrome.  Some psychologists think we use hindsight bias as a way to create explanations so that the world can be “predictable”.  There was an experiment done in 1986 by Karl Teigen that displays this bias perfectly.  In his study, Teigen gave participants several proverbs to evaluate as true or untrue.  First, the participants were given the proverb “Fear is stronger than love” and most participants rated it as true.  Then, participants were later given “Love is stronger than fear” where most participants again rated as true.  How can this be?  As things are validated as truth, people tend to establish a stronger connection to it.  In this experiment, the fact that the statement was a proverb and printed on text seemed to give validity to the statement.  Um… both statements.  
   

How does hindsight bias relate to our personal investing?  Well, many investors today will look back at the tech bubble burst [insert any bubble] in the early 2000s and claim it was obvious that it occurred.   Well, of course looking back at it now, our minds will remember factors leading to the tech bubble burst more significantly.   This behavior constantly happens and it contributes to overconfidence.  For investors, overconfidence can be a very dangerous thing.  It gives people the belief that they have a superior ability to pick the best stocks when in fact, that may not be the case.  We can avoid hindsight bias through acknowledgement.  When we look back at events (like the tech burst), we must remember to explore both arguments.  If we think of all the reasons that we did not see it coming, we can acknowledge that it truly wasn’t so predictable.  Do you ever catch yourself committing hindsight biases?     

Tomorrow… fundamental attribution error!