Hindsight Bias

AAA

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.

VIDEO

Loading the player...
RELATED TERMS
  1. Instant History Bias

    An inaccuracy in the appearance of investment fund returns that ...
  2. Rational Behavior

    A decision-making process that is based on making choices that ...
  3. Reverse Survivorship Bias

    The tendency for low performers to remain in the game, while ...
  4. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  5. Look-Ahead Bias

    Bias created by the use of information or data in a study or ...
  6. Survivorship Bias

    The tendency for mutual funds with poor performance to be dropped ...
RELATED FAQS
  1. Which REITs pay the highest dividends?

    A real estate investment trust (REIT) is a financial security that trades like a stock on major market exchanges. However, ... Read Full Answer >>
  2. What does it mean to be long or short a derivative?

    A derivative is a type of security in which the price of the security is dependent on one or more underlying assets. A derivative ... Read Full Answer >>
  3. What is an over-the-counter derivative?

    A derivative is a type of security in which the price of the security depends on the price of the underlying asset. Depending ... Read Full Answer >>
  4. How can derivatives be used for speculation?

    Derivative securities could be bought or sold to speculate on the future price of the underlying assets. Derivative securities' ... Read Full Answer >>
  5. What does it mean to roll a derivative contract?

    A derivative is a financial instrument in which the price of the derivative is dependent on an underlying asset. A derivative ... Read Full Answer >>
  6. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Understanding Investor Behavior

    Discover how some strange human tendencies can play out in the market, posing the question: are we really rational?
  2. Active Trading

    Tales From The Trenches: Hindsight Is 20/20

    Follow along with one of ChartAdvisor's failed trades and learn from our mistakes.
  3. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  4. Investing Basics

    Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.
  5. Investing Basics

    4 Behavioral Biases And How To Avoid Them

    Here are four common common behavioral biases for traders and how to minimize their effects on your portoflio.
  6. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  7. Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

    Discover how put-call ratios and moving averages can be used to analyze investor behavior.
  8. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  9. Trading Strategies

    When To Follow The Crowd And When To Lose It

    Our profits ultimately depend on the misfortune of other market players.
  10. Active Trading Fundamentals

    The Shiny Object Syndrome that Kills Trader Productivity

    People get distracted and, in their excitement, they end up trying to learn everything rather than focusing on the subject they had originally set out to learn.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center