Investing

Hindsight bias says to abandon your plan. Here’s why you shouldn’t.

It’s one of the most famous moments in music history—on New Year’s Day in 1962, a little-known rock band auditioned for Decca Records execs, but the label promptly rejected them. This group went on to become a worldwide sensation and one of the most influential bands of all time.1 We know them as The Beatles.

Nearly 60 years later, many believe Decca should’ve recognized The Beatles’ talent immediately and predicted their future success. This is what’s called “hindsight bias”—also known as the “I-knew-it-all-along phenomenon”2—a tendency to believe we knew something was going to happen or that we actually predicted it. Hindsight bias exists prominently in investing.3 No matter the market conditions, there are always messages from the media or the investing community that a market event, such as an extreme drop or increase, was foreseen, perhaps even obvious. If you begin to believe you’ve missed opportunities or you’re at risk for losses, you might attempt to overcorrect by trying to time the markets or weighting your portfolio too heavily in one area. Although we can’t eliminate hindsight bias, we can shift our thinking from “I knew it” to “What can I learn from this?” with a few minor actions:

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