Our weekly explainer on economics using lessons from popular culture. In Installment 42, Bradley Cooper falls for the Hindsight Bias.
“I love you. I knew it the moment I met you,” says Bradley Cooper to an alluring Jennifer Lawrence in the climax of the movie Silver Linings Playbook. Now, fans of the movie might melt at this classic feel-good moment in what was, for the most part, a raw and sensible movie.
Ms Lawrence’s character immediately embraces Mr Coopers’ revelation, but the behavioural economist in me did not buy it. Mr Cooper’s character, for more than half the duration of the movie, was trying to re-ignite his relationship with his ex-wife, and it took a lot of running together, honest conversations and dancing (apparently in Hollywood, they dance before falling in love) for him to develop romantic feelings for Ms Lawrence’s character.
There’s an explanation for why this happened: the Hindsight Bias. Also known as the ‘knew-it-all-along’ effect or creeping determinism. When an event occurs, it’s easy for us to believe that we knew the outcome in advance. The event(s) in this case were the activities that the two lead characters partook in throughout the movie, and the outcome was, to put it simply, the two of them ‘falling in love’.
Hindsight bias was first studied experimentally by Israeli psychologists Ruth Beyth and Baruch Fischhoff in a paper titled “I knew it would happen: Remembered probabilities of once—future things”. The two researchers asked participants in a study to determine the likelihood of several outcomes of president Richard Nixon visiting China and Russia. When President Nixon returned from the visits, the participants were asked to recall the probabilities they had assigned to each possible outcome. It was observed that peoples’ perceptions of the likely occurrence of each outcome were greater for events that had actually occurred.
Similarly, this cognitive bias exists can be witnessed after a game of sports. If a player who is out of form wins the match for his team, you’d often spot armchair analysts proclaim, “I knew today was his day” or “This was a long time coming”. They’re just falling prey to the hindsight bias — there was no way in which they could have predicted the player’s performance on the day.
A part of society that is frequently plagued with hindsight bias is the financial sector. After the 2008 financial crises, investors and market economists made claims about the market crash being inevitable. Yet, hardly of them predicted it when it was about to happen, nor did they take any action to protect their own portfolios from the crash. The bias also tricked their minds into believing that they could see the next crash coming, just because they ‘predicted’ the last one.
In a paper published in the Association for Psychological Science, psychologists Neal Roese of the Kellogg School of Management and Kathleen Vohs of the Carlson School of Management warn us that the Hindsight Bias matters even more as a psychological phenomenon because it acts as a deterrent while learning from past experiences. “If you feel like you knew it all along, it means you won’t stop to examine why something really happened,” explains Roese. “It’s often hard to convince seasoned decision makers that they might fall prey to hindsight bias.” The feeling of always being right is likely to breed overconfidence in you. For example, it is been shown that overconfident investors and business leaders have a greater probability of taking on risky, ill-informed ventures that fall short of desired rates of return on investment.
So now that you’re aware of what the hindsight bias is, will you try to eliminate it from your decisions?
Perhaps, yes. (I knew it!)
But research shows that you’re likely to fall prey to it even if you are aware of it or possess the intention of eradicating it. There’s no such thing as winning.