The fallacy of hindsight – the feeling that the fact was evident after the outcome is known – is a significant factor that undermines the truth of probability and risk in decision-making. The occurrences of hindsight bias, or the ‘I knew it’ moments, are prominent when the results are adverse. As per scientists Neal Roese and Kathleen Vohs, there are three bias levels. They are:
- Memory distortion (not remembering the earlier opinion)
- Inevitability (the event was inevitable)
- Foreseeability (the conviction that the person knew it beforehand)
When hindsight bias is all about dismissing the past decision-making process after a negative result, the ‘fear of missing out’ (FOMO) is the intrinsic motivation to act due to (the memories) positive outcomes of the past. Although the term FOMO was initially introduced (in 2004) to describe people’s compulsive behaviour on social networking sites, it is pervasive in several walks of life, including decision-making, investing, and trading, to name a few.
Issues of hindsight bias
The biggest concern is that it discounts the role of probabilities and trade-offs in decision-making, leading to labelling the initial decision-makers as a joke. If you recall the expected value theory, it is almost like forgetting about the probability of failure of the equation. It is more dangerous than just finger-pointing. Hindsight bias causes overconfidence in individuals and decreases rational thinking while navigating complex problems. ‘Always feeling wise’ also reduces one’s ability to learn from mistakes.
And the FOMO
FOMO is just the opposite of what a value investor may want to do. Typically, FOMO leads to chasing stocks during a bull run of the market, or perhaps the very reason for the bull market! While a few lucky ones may be able to cash during the market run, most people with ‘buying high’ end up losing on the crash. FOMO can create collective anxiety in organisations about missing investment opportunities, especially with speculations about the possibilities of ‘things’ happening elsewhere.
References
Hindsight bias: Wiki
Fear of missing out: Wiki
