Hindsight Bias: Your Memories Are Guaranteed To Fool You

Knew it all along. The hindsight bias is the tendency for people to perceive past events as having been more predictable than they were. After something has occurred, people often believe they could have predicted or known with a high degree of certainty what the outcome would be before the event happened. Hindsight bias distorts memories of what was known or believed and is a source of overconfidence in our ability to predict future events. Notable examples are historians describing battles, physicians recalling clinical trials, and criminal or civil court cases. As they say, hindsight vision is 20/20.

Hindsight bias is not a new phenomenon in psychology. It had been described numerous times by historians and philosophers long before it emerged in empirical research in the 70s. The classic method for testing it is giving participants a short story with four possible outcomes, one of which they are told is true. They are then asked to assign the likelihood of each particular outcome. Participants, as a rule, give higher likelihood to the outcome they are told is true. It’s easy to extrapolate how this skews our decision-making—banking and investing strategies in particular.

To simplify why it happens, understand it like this. People only remember small, select amounts of information. When asked to recall it later, they use a biased image to support their opinion about the situation. The set of images is a mix of the original processing in the brain as the event was first experienced and current beliefs. The mind has an incredible ability to alter memory. It’s like photoshop. Old, incomplete data, is mashed with new, complete information after the fact. We then believe the assembled image, and the existing memory is altered, sometimes permanently.

In other words, we don’t remember memories themselves. We reconstruct them as they “should be” according to new information, our beliefs, and what is “reasonable”. Hence after an event occurs, we deem it was inevitable from the get-go. For instance, after a sports game, fans might claim the winning team was “obviously” going to trump the losers, even though the outcome was entirely uncertain prior to the match. Similarly, an investor is likely to recall being more confident about a stock’s performance than they actually were before it soared. Cognitive dissonance is reduced this way: people can make sense of past events. Believing a business failure was inevitable or a political election was obvious helps rationalize feelings of doubt and uncertainty.

Real-world implications of hindsight bias:

• Business: investment decisions: investors may look back on market crashes and convince themselves the downturn was obvious, despite there being no warning variables and the volatility of markets; management: leaders might claim that project failure was foreseeable, warping future risk assessments and decision-making;

• Legal: jury decision-making: jurors may be swayed by hindsight bias when evaluating a defendant’s actions, resulting in their belief that a crime was predictable when it really wasn’t; accident investigation: a forensic scientist might overstate the predictability of an accident, potentially misassigning blame;

• Learning: retrospective judgment: a student might think they “knew” an answer all along after seeing the solution, undermining the learning and reflection process; tests: educators have to be cautious not to overestimate students’ understanding of material based on hindsight assessments;

• Personal decisions: after a major decision, you might convince yourself that the outcome was inevitable, which can stop you from learning from mistakes; similarly, you might claim that a breakup or disease was obviously coming, even if the warning signs were ambiguous, blaming yourself for no reason.

How you might mitigate hindsight bias: (1) record predictions, as keeping a log or journal of your predictions or thoughts before an event occurs will provide a more objective reference later if required, such as a trading journal as an investor; (2) seek multiple viewpoints, discussing events with others who have different insights can help you counteract individual biases, like by conducting a business post-mortem to see what was predictable and what came unexpectedly; (3) practice reflection, actively reminding yourself that outcomes can indeed be unpredictable and recognizing uncertainty as part of sound decision-making; (4) use pre-mortem analyses before finalizing decisions by imagining what could go wrong, in aim to counteract your natural tendency to see outcomes as inevitable in hindsight.

Hindsight is always 20/20. Past events seem clear when viewed in retrospect. Even if they were entirely unpredictable and uncertain at the time. We believe we predicted the future. The reality: we saw the path it took after it happened. Know the difference. We reconstruct memories to fit internal narratives. Not the other way around. Acknowledging uncertainty is a strength, not a weakness. Unpredictability and knowing how to handle it is in the toolkit of any good decision-maker. Watch out when judging the past. Live in the present instead. It’ll make you happier.