Hindsight Bias- Logical Fallacy #6

Blog for February 26, 2020

Hindsight Bias- Logical Fallacy #6

Hindsight Bias is very common and one of the worst fallacies we can have when investing for the long term.  Let me explain.

I can’t tell you how much I hear this bias.  It is related to “should statements”. You may recall that should statements are false or unknowable.  When you say, “I should have bought XYZ stock!”  we compare what is actually going to happen with “our magical powers of prediction,” which of course nobody has.  So, blaming yourself for your decision is a waste of your time. 

Hindsight bias is what makes us say, “I knew that stock was going to go up!” Here’s the cure: Thinking rationally, if you knew the stock was going up, you would have purchased it 100% of the time.  You would rationally re-finance your house or use other assets to buy all you could. The fact that you didn’t buy it proves that you did not know which way it would go. So, don’t beat yourself up! 

should have done more research.” Research alone won’t help you be infallible at all. The best minds in finance are wrong much of the time.

Should you spend time and emotional energy kicking yourself for not having supernatural powers?  When you say, “I should have known that was going to happen”, you are just getting caught in another defective thought.  You should have known?  Really? Are you psychic?  Are you God?  No. So why in the world would you feel stupid when choosing incorrectly.  Well, here are a couple of negative defective thoughts that go with it.

  • “I should have done more research.” Research alone won’t help you be infallible at all.  The best minds in finance are wrong much of the time. 
  • I will never believe that guy again!  Well you take advice from someone who knows his/her stuff.  Also, the rule of thumb here from Peter Lynch is: Just because a stock goes down, doesn’t mean you are wrong.  And, just because a stock goes up, doesn’t mean you were right.  You bought the stock for the long, long run and get pumped up or down by the behavior of the stock especially during the first year or two.  See “Faith and Patience” blog for more on this.

If there really were psychics, why aren’t they buying stocks instead of selling “readings?” So, if psychics aren’t really psychic, why do you think you are? I used to keep a 10-year-old copy of the Wall Street Journal in my desk.  When people start saying “I should have known”, I say “why don’t we take a look at this old Wall Street Journal and go on a huge crying jag about all the stocks that are up 10 or 100 times in value that we “should” have known about”!

The fact is you don’t have to know.  You will get wealthy over time with faith and patience and wisdom, not omniscience!

Outcome bias is a variation of hindsight bias.  When the outcome is known it is impossible to go back and ascertain your original state of mind.  For instance, when a person dies in surgery, the result is going to bring an outcry that it was too risky and that it should have been known by the surgeon.  It may become a news event, especially if the patient was a celebrity.  After the surgery, it is impossible to know how confident the loved ones or the other medical professionals were.  As investors, we do this all the time.  Not every stock you are confident about will go up–and in some cases you will wonder why you ever deemed it to be a good choice.  Since the results seem so clear after the outcome is known.  

A good example of Outcome Bias is the confidence I had about the prospect that the trucking industry would be revolutionized by the natural gas engine.  It never happened. 

See you soon,