how to avoid hindsight bias
investors should be careful when evaluating their own ability to predict how current events will impact the future performance of securities believing that one can predict future results can lead to overconfidence and overconfidence can lead to choosing stocks or investments on a hunch not for financial performance or value here are some tips to help you avoid this bias professions that require a lot of feedback such as accounting are less prone to hindsight bias hindsight bias can distract investors from an objective analysis of a company sticking to intrinsic valuation methods helps them decide on data driven factors not personal ones intrinsic value refers to the perception of a stock s true value based on all aspects of the business it may not coincide with an investment s current market value to avoid hindsight basis it s best to use a mathematical model this takes much of the guesswork and bias out of analyzing a company quantitative factors such as financial statements and ratios are much more indicative of performance than opinions based on personal experience quantitative aspects such as financial statement analyses offer insights into whether the current market price is accurate or the company is overvalued or undervalued an intrinsic valuation will also take into account qualitative factors such as a company s business model corporate governance and target market notably there s no universal intrinsic value calculation there are many different models or valuation tools to use some assumptions must be plugged into any model which can open that model up to bias examples of hindsight biasfinancial bubbles are always subject to substantial hindsight bias after they burst for example following the dot com bubble in the late 1990s and the great recession of 2008 many pundits and analysts demonstrated their precise knowledge of how events that seemed trivial at the time were harbingers of future financial trouble they were right but other concurrent events reinforced the assumption that the boom times would never end in fact if a financial bubble were easy to spot as it occurred it would likely have been avoided altogether the usual subjects of hindsight bias are not on that scale for instance many investors in the 80s were interested in technology industrials and materials but computer software and hardware were only making their debut many didn t see the industry amounting to anything as a result there are quite possibly millions of investors from that time who deeply regret not buying stock in microsoft or apple when they saw it coming business professionals will often use hindsight bias in decision making assuming because a strategy worked previously it will continue to work unfortunately hindsight bias means executives can and might make risky or poorly analyzed decisions anyone that s heard the old sayings it worked before it should work again or this is how we ve always done it at work has experienced an example of hindsight bias in the professional space 