When it comes to choosing investments, it’s important to be aware of two cognitive biases that can lead us astray: hindsight bias and outcome bias.
Hindsight bias is the tendency to think “I knew it all along!” after the fact, even if the event was difficult or impossible to predict beforehand.
This bias can lead us to become overconfident in our ability to predict the success of similar investments in the future, which can be a bit like thinking you’re a stock picking pro because you made a few lucky guesses in the past.
To avoid falling victim to hindsight bias, it’s important to always do thorough research, even when we feel it’s unnecessary.
Outcome bias is the tendency to evaluate the quality of a decision based on the result, rather than the amount of research and thought that went into making the decision.
For example, we may consider an investment successful because it turned out well, rather than because we thoroughly researched it beforehand.
To make quality investment decisions in the future, it’s important to be aware of and compensate for this natural cognitive bias. After all, sometimes even the most carefully researched investments don’t pan out as expected.
So, when it comes to choosing investments, be sure to do your due diligence and consider all the factors that went into a decision. Don’t let hindsight bias make you overconfident, and don’t let outcome bias cloud your judgment.
For further reading on these two biases, check out the following resource:
- https://www.skybrary.aero/index.php/Hindsight_and_Outcome_Bias (covers both biases in the flight safety industry)