![]() It might be that they had some good information, or some good luck, or they were genuinely shrewd. With their first few trades, they end up making money. Imagine a trader who is fairly inexperienced. Let’s use a hypothetical example to illustrate how hindsight bias could impact trading. Reinforcing stereotypes: Hindsight bias could reinforce stereotypes, as people may assume that the outcome of an event was predictable based on their pre-existing beliefs or biases. Inflating personal responsibility: Individuals could end up believing they were solely responsible for a positive outcome, overlooking the contributions of others or external factors. Hindering learning: Hindsight bias could make it difficult for people to learn from their mistakes, as they believe they would have made the same decision regardless of the outcome. Underestimating the role of chance: Hindsight bias could lead people to underestimate the role of chance in determining the outcome of events, and to assume that the outcome was the inevitable result of the decisions made. Misjudging the value of information: When evaluating decisions in hindsight, people may assume that information that turned out to be important was always important, even if it was not recognised as such at the time. This in turn could lead to overconfidence in their own decision-making abilities.īlaming the victim: In cases where a negative outcome has occurred, hindsight bias could cause people to blame the victim or believe that they should have known better, rather than recognising that the outcome was not foreseeable. Overconfidence: Hindsight bias could lead people to believe that they knew the outcome of an event all along. ![]() In a 2012 paper, she wrote that, for instance, people with jobs where they receive a lot of timely and clear feedback before making a decision were less likely to experience hindsight bias. Often, the combination of these stages end up making people think they might have predicted events better than they actually did.Īccording to Kathleen Vohs, a social scientist at the University of Minnesota’s Carlson School of Management, some people are more likely to experience hindsight bias. ![]() Predictability is the “I knew this would happen” stage, inevitability is the “This was always going to happen” stage and memory distortion is the “I said this would happen” stage. In many ways, these stages form a process. They might end up convincing themselves that what happened was something that they believed would happen. People might remember an event incorrectly, with the benefit of hindsight. This isn’t limited to traders, believing that the final outcome of a situation was inevitable can happen with anything, from the result of sporting events to the weather. With some people seeing an event that occurred as having had the most likely outcome, they may end up exaggerating how well they predicted it. Sometimes, an event may seem inevitable in retrospect. ![]() This could be triggered by a successful trade, which leads to a level of overconfidence. If something happens, a trader might feel like they had an inkling it was going to happen. In order to define hindsight bias, it is important to understand its causes. Hindsight bias has three components: predictability, inevitability and memory distortion.Īcting with due care and analysing the result of trades may help traders combat hindsight bias. Traders can fall victim to hindsight bias, meaning they could potentially lose a lot of money. Hindsight bias is the psychological phenomenon of looking at a past event and thinking the outcome was either inevitable or predictable when it wasn’t. ![]()
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