Hindsight Bias

Definition of 'Hindsight Bias'


A psychological phenomenon in which past events seem to be more prominent than they appeared while they were occurring.  Hindsight bias can lead an individual to believe that an event was more predictable than it actually was, and can result in an oversimplification in cause and effect. It is studied in behavioral economics.

Investopedia explains 'Hindsight Bias'


Hindsight bias is a fairly common occurrence in investing, since the pressure to time the purchase of securities in order to maximize return can often result in investors feeling regret at not noticing trends earlier. For example, an investor may look at the sudden and unforeseen death of an important CEO as something that should have been expected since the CEO was likely to be under a lot of stress.  

Financial bubbles are often the subjects of substantial hindsight bias. Following the Dot Com bubble in the late 1990s and Great Recession of 2007, many pundits and analysts tried to demonstrate how what seemed like trivial events at the time were actually harbingers of future financial trouble. If the financial bubble had been that obvious to the general population, it would have been more likely to be avoided.

Investors should be careful when evaluating how past events affect the current market, especially when considering their own ability to predict how current events will impact the future performance of securities and the overall market. Believing that one is able to predict future results can lead to overconfidence, and overconfidence can lead to choosing stocks not for their financial performance but for personal reasons.



Related Video for 'Hindsight Bias'

comments powered by Disqus
Hot Definitions
  1. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  2. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  3. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  4. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  5. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  6. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
Trading Center