The definition and explanation of hindsight bias (Monday morning quarterbacking):

How many times have you found yourself or others using phrases like "I knew it would happen" or "I told you so" after an event occurs?

Today, we will discuss the bias of being a Monday morning quarterback and take a look at this phenomenon of "forewarned is forearmed" from an investment perspective, as well as the dangers it may pose to you.

What is the hindsight bias?

The hindsight bias, or the subtle determinism, is a common misconception where people refer to past events and assume that these events were more predictable than they actually were. In this case, an individual will claim after the event occurs that he/she knew the outcome of the event before it happened. This leads a person to believe that they may possess a special talent when it comes to predicting the outcomes of similar future events.

These biases have affected human history as a whole, and even historians have been biased when describing the outcomes of wars because they let the knowledge of the war outcomes influence their narratives. This bias has been noted in various situations such as politics, scientific experiments, and sports events.

Although this phenomenon is widespread, it was not until the 1970s that psychological research began to study this issue, and soon after, behavioral finance also started to investigate this problem. Researchers believe that this bias occurs because our brains tend to establish connections with all the other information we already know when we learn something new. This leads us to search for patterns before each outcome.What impact does it have on stock investors?

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The hindsight bias can influence our investment decisions just as it affects our predictions in other areas, such as cricket matches. When investors are surrounded by stocks, they are in a high-pressure environment. This is because missing out on potential buying opportunities or making poor stock investments can often sacrifice wealth accumulated over many years. This further forces them to always want to accurately time the stocks.

In adverse situations, when their stock investments may decline, they will even look back and convince themselves that they saw it coming. This is especially dangerous because if similar patterns repeat in the future, they will make decisions based on incorrect predictions that are not supported by research.

This can be dangerous, even if they might be right, because by luck they may continue to believe they have won success. This can lead to overconfidence, thinking they have foresight or intuition. This may encourage them to take unnecessary risks in the future, which can be destructive to investors.

How can investors avoid the hindsight bias?

Investors can avoid being trapped by their own psychology through the following simple remedies:

1. Make decisions based on research

Stick to objective analysis of the pros and cons of a particular stock.On this basis, investors may make the most appropriate decisions.

2. Envision the best and worst possibilities

Investors with hindsight bias have already focused on the profitable future they might have had based on their decisions. Generally, when we look forward to a bright future, we seek information that aligns with this narrative.

To counteract this bias, one can consider mentally reviewing potential negative outcomes, which can provide a more balanced perspective. Anticipating the downside also helps us plan for the unexpected.

3. Keep an investment journal

Investors can maintain an investment journal. In this, investors should document all investment decisions, the reasons behind the decisions, and their respective outcomes.

This also helps investors learn from their mistakes and successful investments.

Furthermore, it can better rationalize investments, as it will help curb our emotions and keep our confidence in check.

In summary

The ability to look back allows us to improve by learning from our mistakes and also enables us to plan for the future more effectively. However, the hindsight bias is a cost we pay when looking back on past references to investment losses.But if you now realize that we have this bias, it is the first step in improving ourselves.

This reflection allows us to improve our investment plans and may even implement the aforementioned remedial measures, thus avoiding significant mistakes in investments.