How Hindsight Bias Can Affect Your Investing

Jun 27, 2016 | Blog, Investing

Whether it’s discussing the results of a sports game or interpreting world events on national TV, we’re constantly inundated with people saying “I told you so.”

This plays out in a big way in investing. Tune to any news channel, and you’ll most likely hear about how a stock’s current performance was neatly tied to a past prediction. While these analyses may be entertaining to watch, it can play out in dangerous ways through something known as  hindsight bias.

What is hindsight bias?

Hindsight bias is a psychological phenomenon that can lead an individual to believe that an event was more predictable than it actually was. For instance, there are a slew of factors affecting the ups and downs of the stock market. Through hindsight bias, you might believe that a single factor (like a new product announcement) led to these stock market changes.

Not only can this lead to some false “I knew it all along” moments, but it can also become very costly in the future. It can lead to overconfidence (which is harmful in investing) and the temptation to make forward-facing predictions through risky bets in the stock market.

How can you prevent hindsight bias from affecting you investing?

It might seem counterintuitive, but avoiding the media can help you become a better and smarter investor. If you’re focused on the long-term, the myopic predictions of the media can tempt you to throw this plan out the window, often while losing your hard-earned wealth in the process.

Want to learn more?

At LexION Capital, this knowledge drives much of our approach to investing. Our focus is on long-term investment results, not making day-to-day predictions about the stock market. We work with each client individually to help them achieve this through a bespoke investment portfolio tailored to their exact needs and goals. If you would like to learn more about how we can work with you, don’t hesitate to reach out today.


Share This