“Of course I knew that all along.” “This is what I thought was going to happen.” “It was inevitable.” You can say that about relationship breakdowns, football results, and the economy. It’s remarkable isn’t it? Despite how obvious it is that things are going to turn out in a certain way, most of our wise comments about inevitability are made after the event in question occurred. Are our apparently wise people, in fact, victims of the hindsight bias?

How many economists predicted the finance crisis of 2008? Sometimes it seems as if there are now more economists who say they predicted the crisis of 2008 than there were economists before 2008. Central banks were among those who predicted the crisis, except that they didn’t predict it. Central bankers tend to say and write an awful lot. Sorry, but if lurking among that mass of noise was the odd note, here and there, suggesting a slight degree of discord about the economy, that doesn’t count.

Psychologists have put the idea of a hindsight bias to the test. Take a study conducted by Baruch Fischoff in 1975. Two obscure events in history were described to people. Then four possible outcomes were outlined, and subjects were asked which was the most likely? Subjects gave various answers, assigning different levels of probability to each possible outcome. A second group of subjects were first told what the final outcome was and then asked which of the four outcomes were most likely. It probably won’t surprise you to learn that in cases when subjects knew what the actual outcome was, they assigned a much higher degree of likelihood to that outcome than the other three possible outcomes.

The truth is that we all practice hindsight bias, and it is possible that we do it more than we think.

Now apply the idea of hindsight bias to that whirl of chaos that is the real world. Stuff, as they say, happens. Rather a lot in fact, how many outcomes do we say were predictable, when in fact we are just applying hindsight bias?

And now apply the idea of hindsight bias to individuals who have been very successful, and have made lots of money. The media may find friends to interview who knew them at school, and these former school friends might say, “I always knew he was going to make it.”

Supposing luck plays more of a role than we give it credit for. We then look back and apply hindsight bias and see skill when there was chance, brilliance when in reality there was stumbling in the dark.

As for making money, many entrepreneurs who have made it big time, look back on their life and see how they did it; with hindsight they understand how clever they were.

But a surprising number look back and scratch their head and say, I was lucky there; I wonder how things would have turned out if I had done such and such instead of what I did, rr If I had not met a certain person? Such people may be on the road to throwing off the tyranny of hindsight bias
See Was Buffett lucky?

© Investment & Business News 2013