Hindsight bias makes past events seem more predictable than they actually were from "summary" of The Little Book of Behavioral Investing by James Montier
Hindsight bias is a common cognitive bias that affects our perception of past events. It leads us to believe that we knew all along what was going to happen, even when the reality is quite different. This bias causes us to remember past events as being more predictable than they actually were. We tend to overlook the uncertainty and randomness that existed at the time and instead create a narrative that makes the outcome seem inevitable. When we look back on past events, we often forget about the various factors that were at play and focus solely on the outcome. This selective memory leads us to overestimate our ability to predict the future. We convince ourselves that we had all the information we needed to foresee what was coming, when in fact, the situation was much more uncertain than we remember. Hindsight bias can have dangerous consequences for investors. It can lead them to believe that they are better at predicting the market than they actually are. This overconfidence can result in risky investment decisions based on flawed assumptions about the predictability of the market. Investors may also fail to learn from their mistakes if they believe that they were unavoidable in the first place. To combat hindsight bias, investors should remind themselves of the uncertainty that existed at the time of past events. They should also consider alternative outcomes that were possible but did not materialize. By acknowledging the role of chance and randomness in the markets, investors can avoid falling into the trap of believing that they can accurately predict the future.
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