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Tuesday 24 June 2014

H is for Hindsight Bias

Hindsight Bias is the tricky problem that in the past we think we predicted the present, so here in the present we think we can predict the future. Only we didn't predict the present, we only think we did, and we can't predict the future because we don't have the gift of foresight. Nobody does (that only happens in movies and magic shows and it's not real).


One study of investors showed that not only did investors confuse their predictions with their outcomes but that they couldn't actually recognize their mistakes afterwards. Interestingly real financial managers were more biased than students, probably because their incentives to be correct were greater. Hindsight bias is a particularly nasty problem because the more invested you are in an outcome the more likely you are to suffer from it.


Unsurprisingly, according to one study there are multiple, interlinked causes. We seem to have a need to see the world as a structured place within which we can exert control, so we tend to create stories out of history to make sense of it, but we can only remember things which have already happened, not those that didn't: the net result is that the stories we create seem to have been inevitable. But they weren't, in fact they aren't even what really happened. This type of oversimplification of the past is probably a way of guiding future action - it's just not a very good one in our modern, complicated world.


Even the CIA agrees that it's virtually impossible to eliminate hindsight bias, but at least attempting to consider possible alternative outcomes to our actions - e.g. we go bust betting on that sure-fire stock instead of becoming billionaires - and putting actual probability values on those alternatives can at least force us to consider the possibility that we may be biased. Keeping a diary and occasionally re-reading it can be a real eye-opener too.

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