Sometimes we just know something will happen and it does. But experts say channelling that experience into decision-making is an error that leads to mistakes.

On 8 November 2016 – US election night – the betting odds of Donald Trump winning the presidency had narrowed to five to one. By the following morning, he'd managed to pull off a feat many thought impossible, but that didn't stop the I-told-you-sos – friends, family members and even online soothsayers – who claimed to have known all along that Trump would triumph despite such bad odds.

To a lesser extent it happened in November 2008 too, when Barack Obama won the election. After accepting the Democratic nomination three months earlier, his chance of victory hovered around 60%. When he won, you may well have been one of those who ‘knew’ that was going to be the outcome, and imagined that his odds of winning had been much, much higher. But just because he won didn’t change his odds of winning prior to his victory.

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This is hindsight bias – a phenomenon in which we revise probabilities after the fact or exaggerate the extent to which past events could have been predicted beforehand. Politics doesn’t have a monopoly on this: we’re guilty of hindsight bias when we talk about the weather (there’s only a 20% chance of rain, but you say it’s going to rain and it does, and suddenly you have better forecasting ability than the experts); it happens at sporting events, in court rooms, in medical decisions and in business.

In fact, hindsight bias is one of the most widely studied of what are known as ‘decision traps’, in which people routinely employ mental shortcuts to simplify decisions when they're not certain; decisions that are often skewed by cognitive biases: we guess something improbable will happen and it does, but those probabilities never changed – and, believe it or not, nobody possesses supernatural abilities.

Causes and consequences

According to Nobel Prize-winning American economist Richard Thaler, businesses may be more prone to hindsight bias than other entities. In one study, researchers found that 77.3% of entrepreneurs in charge of failed start-ups believed that – before the failure – their company would grow into a successful business. After they failed, only 58% said they had originally believed their company would be a success.

In an interview Thaler gave to business magazine McKinsey Quarterly, he said if a CEO decided to gamble on an idea that looked good, then a few years later it turned out a competitor came up with a better product, “the CEO is going to remember, ‘I never really liked this idea’”.

Thaler says a simple fix could be to write things down; to make a record of how a decision was made at the time so that companies can learn lessons after the event. “Any company that can learn to distinguish between bad decisions and bad outcomes has a leg up,” he says. “Memorialise the fact that the CEO and the other people that have approved this decision all have the same assumptions, that no competitor has a similar product in the pipeline, that we don't expect a major financial crisis.”

Kathleen Vohs, a social scientist at the University of Minnesota's Carlson School of Management, co-authored a 2012 paper on hindsight bias which found that its consequences included “myopic attention to a single causal understanding of the past (to the neglect of other reasonable explanations) as well as general overconfidence in the certainty of one’s judgements”.

If, for example, you are in the kind of profession where you receive a lot of timely and clear feedback before you render a decision, like accounting, you’ll tend to show a smaller level of hindsight bias.

Vohs says some are more prone to hindsight bias than others. If, for example, you are in the kind of profession where you receive a lot of timely and clear feedback before you render a decision, like accounting, you’ll tend to show a smaller level of hindsight bias.

Much of the business world, though, is unclear in terms of what causes success or failure – which is often due to multiple factors. “When you have ambiguity like that…  people can come up with a mental causal pathway in which they believe they can see how something would have occurred - ‘oh, I can see very clearly how that would have happened’ – [then] you have a higher level of hindsight bias,” she says.

Drew Boyd, executive director of the University of Cincinnati’s MSc Marketing programme, says one direct result of hindsight bias is something called stereotypy. “It happens in business a lot when you think that something that has happened before is going to happen again. It seems to make sense. But then it doesn’t happen again and you wonder what happened.”

“Business people will decide on a strategy because it worked for them before. But the conditions in the next environment are going to be different: it’s a different market situation, different people, and it’s a mistake to immediately assume that what worked before is going to work again.”

How to de-bias and improve your decision-making

Boyd says a good way to avoid such errors is to start again: “Consider what happened before, but fold in new pieces of information, widen the field, incorporate new data along with old data. What people have to remember is they’re succumbing to an even broader bias called omission neglect – a tendency to consider only the evidence we have available to us.”

The saying goes that hindsight is 20:20, but Boyd says it’s worse than that. “It makes people think they can look back at past events and interpret something; it makes them think they have new ability to predict.” He says that in order to correct for hindsight bias, you have to realise you don’t possess a crystal ball.

“We try to teach people to use what we call Bayesian thinking. [Eighteenth Century English statistician] Thomas Bayes’s premise was to consider all sources of information but weight them: some information is more valuable, but all information has some value. Weight that information appropriately and you tend to make the best decision… make decisions based on what the data says is likely to happen, not what you think is going to happen.”

American businessman Warren Buffet, Boyd says, has a formula he calls ‘value investing’. “He follows it, but he knows the odds of succeeding are what they are. He doesn’t always hit magic; he loses occasionally, but he doesn’t say the odds were against him those times. Successful people understand risk for what it is and don’t make revisions in hindsight. Go with the odds, not the gods.”

Once you have your little narrative in your mind, think: how could the outcome go in a different direction or not occur at all

Kathleen Vohs says there is one de-biasing tactic she favours known as the ‘consider the opposite strategy’. Before rendering a decision you should flip it and think: how could this not have gone the way you anticipated? “Once you have your little narrative in your mind, think: how could the outcome go in a different direction or not occur at all?” she says. “If you flip the script like that in a number of ways you can reduce hindsight bias.”

Vohs says this method has the effect of disrupting your confidence. “Anything that reduces people's confidence in predicting something will happen or the pathway in which something will happen is a good way to go about it.”

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