Hindsight Bias: What it means for your investments and returns?

Have you ever been in a situation where you predicted something and the same happened and you felt like you can predict future. In India, one can relate this to watching a cricket match and the same also follows while investing in the stock market or even for mutual funds for that matter. This behavior is known as hindsight bias.

Hindsight bias is a psychological phenomenon in which past events seem to be more prominent than they appeared while they were occurring. It may cause an individual to believe that an event was more predictable than it was and as a result this leads to oversimplification of the cause and effect.

Hindsight bias is very common in investing. Investors must be careful in evaluating how past events have affected the current markets, especially, while considering their own ability to predict how current events will impact the future performance of securities or mutual funds. When one starts believing that he or she can predict the future market or mutual fund’s performance, this can lead to overconfidence, and in turn can lead to choosing stocks based on personal thinking and not based on the stock's financial performance. Therefore, it is important to chose your investment wisely and not get effecting by hindsight bias.