Hindsight bias

The tendency, once an outcome is known, to recall having expected it - the genuinely uncertain version of events quietly stops being available.

Example

After a company fails, the warning signs feel obvious. The same signs were present in many companies that did not fail, and nobody recalls noticing them there.

Important

This is not dishonesty, and it cannot be resisted by deciding to resist it, because you are never aware of the substitution happening - confidence in the reconstructed memory is typically higher than confidence in the original belief was. The defence is a contemporaneous document, not a careful memory.

Related terms

• Decision journal — A written record of why a decision was made, written at the time it was made, and never edited afterwards.
• Outcome bias — Judging the quality of a decision by how it turned out, when the result was produced by the reasoning and by chance in proportions you cannot observe.
• Narrative fallacy — Reading a sequence of events as a coherent story with clear causes, when a large part of what happened was chance.

Lessons that explain it

• Write the decision down before you know how it turns out — A decision record captures what you decided, why, the conditions, the main risks and what would change your mind. It turns each decision into something you can learn from later. (9 min)
• The memo is worth more at the two-year review than on the day you wrote it — A memo's real value is not in getting a deal approved. It is in being specific enough, on the day it was written, that reading it again later tells you something you could not otherwise have known. (10 min)
• Amend, date and keep the original - never quietly rewrite — A memo is a record of reasoning at a moment. When facts change, add a dated amendment rather than editing the original, so the evolution of your thinking stays visible and reviewable. (10 min)
• The annual hour that decides whether you learn anything — A thesis that is never reviewed is a belief you happen to have held for years. The review is where a written thesis converts into judgement, and it has to separate what you got right from what merely worked. (11 min)
• Write down why, while you still do not know — Memory does not store your reasoning; it reconstructs it, and it reconstructs it to fit whatever happened. The only honest record is the one made before the outcome existed. (9 min)
• A short review you actually do beats a thorough one you abandon — Decision journals fail through ambition. A fixed, brief monthly pass over recent entries and a longer annual review are enough to produce most of the learning. (9 min)

All 578 terms in the Investing glossary