Stock Market · Mind over Markets

Hindsight bias

Hindsight bias is the tendency to view past events as more predictable than they actually were. After a market crash, everyone 'saw it coming'. After a rally, everyone 'always knew this would happen'. Memory rewrites itself.

The classic example

March 2020 COVID crash: in hindsight, 'obviously' Nifty would crash 40%. At the time, almost no one predicted both the depth AND the timeline of the crash + recovery.

Yet today, you'll find people who claim they 'knew' it would crash. Their actual portfolios show they didn't act on this knowledge.

Why hindsight bias is dangerous

1. Creates false confidence in your predictive abilities

2. Makes you take more aggressive positions next time

3. Distorts learning. You don't update your beliefs because 'you already knew'

4. Makes you trust 'experts' who claim to have predicted things

> Hindsight bias is the reason every Twitter account looks like they make 50% per year. They share the calls that worked and forget the ones that didn't.

The forecast accountability test

When someone says 'I told you so' or 'I always knew this stock would [moon/crash]':

1. Ask for written, dated forecasts (Twitter posts with timestamps, public predictions)

2. Calculate their actual hit rate over many predictions

3. Compare to base rates (random guessing would be ~50% for binary calls)

Almost no one survives this test. The supposed 'gurus' have selective memories like everyone else.

Indian context

TV channels regularly bring back 'expert' callers after major moves. They take credit for correct calls and silence reigns about the wrong calls. Hindsight bias lets them stay credible.

Defeating hindsight bias

1. Write down your forecasts BEFORE events resolve. Track your actual hit rate

2. When you 'see something coming', test it by taking a small position with clear targets

3. Read your old trading journal. You'll find many 'obvious' calls you weren't confident about at the time

4. Be skeptical of anyone (yourself included) claiming to have predicted past events

The investing implication

If your past predictions weren't actually as good as memory suggests, your future predictions probably aren't either. This argues for:

• Diversification (don't bet heavily on any single forecast)
• SIPs (avoid timing the market)
• Modesty about market-timing ability

Takeaway. Hindsight bias rewrites memory: past events feel more predictable than they were. Creates false confidence in forecasting ability. Defeat by writing forecasts BEFORE outcomes and tracking actual hit rates. Almost no one has the prediction record they remember.