Most of you would have watched the 2011 World Cup semi-final between India and Pakistan. Did you “predict” that India would win the match? Typical behaviour indicates that chances are you would say yes.

Our memory is a reconstruction of past events. To answer the question as to whether you expected India to win the match against Pakistan, you will have to reconstruct the events leading up to the match to “know” whether you really expected India to win. The problem is that we often have large gaps in our memory. We fill these gaps based on the information about that event available to us today.In other words, you may be swayed by the actual outcome of the event and genuinely believe that you had “predicted” India to win the match. Psychologists call this behaviour Hindsight Bias. It refers to the tendency of the people to believe, after the event has occurred, that they predicted the event before it happened.

Investment decisions

We suffer from Hindsight Bias when it comes to our investment decisions as well. Many of us in hindsight believe that we “predicted” the stock market crash in 2008 or its recovery in 2009. Hindsight Bias can actually prove costly when it comes to your investment decisions. If you truly believe that you had predicted the past better than you actually did, then you would come to believe that you can predict the future better than you actually can! This can prompt you to take highly risky investment bets.How do you “know” if you are suffering from Hindsight Bias? The proof is in the pudding. If you truly believed that you had “predicted” the 2008 stock market crash, did you substantially reduce your equity exposure before the market tanked? Or if you expected the market to climb up in 2009, did you invest heavily in equity then? If you did not and yet claim that you “predicted” the market crash or its recovery, you are, perhaps, suffering from Hindsight Bias!

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