Oftentimes we come across “If you had invested X amount back in XXXX (enter year of your choice) you would have amassed Y amount by now”. This is the most common line used to sell financial products and investment ideas. But its also elephantine bullshit. Hindsight bias is the technical term used for this situation. We can always look back and tell with certain clarity, what really happened and how it happened. The same cannot be said with future. Below are some behavioral cues of it.
- When we look back, we know only what happened. ‘What could have happened?’ is not known at all. The hindsight bias creeps in because of this disparity. The future can take one of the many paths, whereas in past there is only one path for events, the one that actually happened.
- ‘I knew it’ feeling comes to one when a thing happens right in front of him. This deja vu doesn’t mean the presence of some sort of superior talent, normally portrayed by Nicholas Cage in his movies. When we look into future, it might take one of the predicted paths. What prediction happens, a kind satisfaction comes in due to the release of a hormone. This satisfactory feeling doesn’t mean much if the action is absent.
- Sometimes we act on our deja vu. When the future takes this path, we become overconfident of the ability to predict. This overconfidence leads to us attributing this to skill when in reality it is because of luck.
- If we think about this luck, then we start on the path of “If I had done this, I would have this by now”. A seller of a product also has the same kind of overconfidence. We forget that Reliance Communications was one of bluest of the blue-chips. Same was the case with even Bharti Airtel. As of now, one has become insolvent and other has credit rating downgraded to Junk. Same was the case with Satyam too.
- In hindsight bias, we would say, if you had invested in Wipro, Infosys, GSK Pharma this this this, you would now have this this this. At the same time, we forget that many of that era’s bluechip stocks are now duds too.
- To prevent duds putting undue risk on the portfolio, we look at quarterly numbers with utmost precision. The problem of this habit is premature jettisoning of good stocks. A stock may have a bad show for some quarters. This passing clouds being temporary or permanent is known only in the future. This also the exact reason why one cannot have stock held for decades. You simply don’t know whether the stock is dud or not.
- Ignorance of cognitive biases also plays a role. Whenever we take a decision, some form of bias always shows up. Its impossible to escape bias. But awareness of bias will help as we will be wired to look for that. Which in turn prevents being heavily biased.
- Media gets the bad rap, because of this lack of awareness. Media as an entity cannot admit its mistake. Nor media is aware of its record.