Hindsight Bias – Definition

Cite this article as:"Hindsight Bias – Definition," in The Business Professor, updated December 3, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/hindsight-bias-definition/.

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Hindsight Bias Definition

The hindsight bias is an assumption that the outcome of an event was more predictable than the predictions given to it before it happened. It is a concept in psychology that explains the tendency to perceive the outcome of past events as more predictable than they were before their occurrence. Hindsight bias often occurs after the outcome of an event is already known, this bias comes with the “I knew” or “I’ve always known” syndrome in which people believe they have the ability to predict an outcome than they could so. The hindsight bias is a misconception that can lead to individuals regarding an event as simpler as it really was before its occurrence.

A Little More on What is Hindsight Bias

Hindsight bias is a psychological concept that is also studied in behavioral economics.  In the investment market, hindsight bias may occur when investors believe an investment is more predictable than it was before an investor makes the choice. Usually, when investing, investors seek to maximize returns on investment by purchasing securities with high liquidity, if the investment goes wrong, there is a tendency for anther investor t perceive the investment as more predictable. The common examples of hindsight bias occur after the 2008 Financial Crisis when it seemed like the financial bubbles that led to the crisis were more predictable than they actually were. Hindsight bias often leads to people trivializing important matters after they have occurred.

Hindsight Bias and Intrinsic Valuation

In the investment market, hindsight bias can sweep investors off their track in the sense that investors might fail to carry out an in-depth and objective analysis of an investment or company due to hindsight bias. Hindsight bias is an assumption or misconception about an event that is borne out of individual perception. Intrinsic valuation, on the other hand,  relies on data in making predictions about the outcome of an event. The factors used in intrinsic valuation are qualitative and data-driven, unlike hindsight bias where analysts or individuals base their perception whet they see after an event has occurred.

References for “Hindsight Bias”



https://www.verywellmind.com › Psychology › Theories › Cognitive Psychology

https://www.investopedia.com › Investing › Investing Strategy


https://corporatefinanceinstitute.com › Resources › Knowledge › Trading & Investing

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