The issue of hindsight bias and fooling ourselves about what we think knew a priori haunts investors constantly. We are reminded of this by those who claim they saw the financial meltdown coming. Despite the lack of proof, they remain convinced they knew what was about to happen all along.
These folks are fooling themselves. Due to several cognitive features of the human brain they are convinced of this and other untrue things. Of course, everyone knew Apple was going to be huge, too. Or Amazon or Google or Facebook.
This is a feature, not a bug. Your brain seeks to make sense of a world filled with random events. These coping mechanisms are useful when confronting meaningless chaos. Existential nihilism doesn’t really lend itself to perpetuation of the species.
If you want to see an example of how outcomes affect narratives — how we craft stories after the fact to conform with what we now know — look no further than the U.S. presidential election. I discussed the lessons for investors of hindsight bias and changing narratives, but the sea of headlines making wild sweeping generalizations is even more stunning then I expected.
Most of them are examples of hindsight bias: broad after-the-fact insights that assume victory by one side was predestined.
But was this outcome inevitable?