The "I Knew It All Along" Effect: Understanding Hindsight Bias in Investing

Retirement With/On Purpose

In this episode, Trevor Lawson resumes the series on cognitive biases, focusing on hindsight bias. He defines it as a psychological phenomenon where individuals believe they accurately predicted an event after it occurred, often leading to overconfidence. Trevor shares a personal anecdote about Meta stock to illustrate how this bias can affect investment perceptions. He explains that hindsight bias stems from new information altering recollections, selective memory, overconfidence, and anchoring. To combat it, Trevor suggests brainstorming alternative outcomes, keeping a decision journal, reviewing journal entries over time, and focusing on intrinsic valuation rather than hunches or recent news. He emphasizes that professional investment analysts rely on data-driven factors to avoid such biases. Trevor concludes by reiterating that hindsight bias is a natural human response, but awareness and strategic practices can help investors avoid making biased decisions.

Reference:
https://www.investopedia.com/terms/h/hindsight-bias.asp

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