Hence, it is important to know our risk tolerance and take investment calls accordingly. Overconfidence also prompts us to take risky investment decisions. We should also check the performance of all our investment decisions.Īs overconfidence is one of the main reasons behind hindsight bias, we need to be practical about our investment skills. However, it is important to understand why the investment decision was a mistake and understand the aspects that we might have possibly ignored earlier. Learn from the mistakes:As investors, we all make mistakes. Before coming to any conclusions, it is better to consider the different perspectives and not just look for reports that reinforce what we already believe. Here are some of the ways that can help us to overcome hindsight bias.Īcknowledging hindsight bias is the first step to win over this bias. Hence, it is important to consider all the outcomes and take precautionary measures. Not planning for the different possible outcomes can shock us. Also, we rarely remember small events that hurt our portfolio. As investors, we do not plan for unexpected events. Taking a higher risk than required can adversely affect our investment portfolio. We only focus on our choices that went right.īecause of the overconfidence and believe that we could predict the outcome, we tend to take more risk and make irrational investment decisions in our investment. However, at the same time, we ignore the investment choices that we got wrong. As the trend continues, it leads to overconfidence in our investing skills. When our stock picks get right or our choice of mutual funds perform well, we start believing that we have excellent investment choices. As a result, investors get a false sense that they know everything about the situation. Overconfidence bias is one of the reasons behind hindsight bias. Here are some of the impact of hindsight bias on your investments. Hence, it is important to understand the effects of hindsight bias. Overconfidence bias also leads to hindsight bias. As a result, we tend to overestimate our capability to predict the outcome. As a result, we sense that we could foretell what was about to take place.īesides, it is easier to remember the outcome than the other possibilities. After a situation has occurred, we tend to construct an image with the bits and pieces that we like to believe in. Our memory is the real cause of hindsight bias. Hindsight bias also plays an active role in investing.Į.g., if you buy a stock and the price falls, you may think that you had an inkling that the price of the stock would fall. Examples of hindsight bias are prevalent in our day-to-day lives as well. This is a common bias that most of us suffer from. Most people assume that they could predict the outcome. Do you get the feeling that you always knew how a situation is going to unfold? Well, it is not uncommon to feel that way.