Hindsight Bias

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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.

BREAKING DOWN '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.

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