Stock Market Hindsight Bias – How Could I Have Missed That?

Ned MontagBy Ned Montag, CEO

Have you ever considered buying a stock but decided to pass, only to watch it torment you by rocketing higher without you aboard?  It happens to professional investors all the time as they analyze dozens of stocks, buying some while rejecting others, always knowing that some mistakes will creep in and some big winners will be missed.  All investment managers make mistakes since the future is always uncertain and often surprising.  

In reality, the decision to buy or pass on any stock idea is never as clear as it will seem with hindsight.  Psychologists such as Nobel Prize winner Daniel Kahneman have identified a mental phenomenon called “hindsight bias,” which is simply the extreme difficulty to judge, after the fact, how difficult a decision was before the outcome occurred.  The human mind has a talent for tricking itself into believing that decisions that were always uncertain were, in fact, quite obvious, once the results are known. As humans, hindsight bias always creeps in, be it in life events or investment decisions.  Many times, we are unfairly judged by this hindsight bias in life decisions as well as financial outcomes. 

Psychologist Baruch Fischhoff demonstrated this phenomenon of self-deception by tasking a group to assign probabilities to 15 possible outcomes stemming from Richard Nixon’s planned 1972 summits with the leaders of the Soviet Union and China.  Once the trips were completed and the outcomes known, Fischhoff tasked his survey members to recall the probabilities they had assigned to each possible outcome.  

The result?  The participants overestimated the probabilities they had assigned to events that actually occurred, while underestimating the probabilities assigned to possible outcomes that did not.  This same inability to remember after-the-fact what had been predicted before-the-fact occurred in other studies too.  (Among the topics tested were the trial of O. J. Simpson and the impeachment of Bill Clinton.)  As Fischoff wrote in 1975, “this lack of awareness can seriously restrict one’s ability to judge or learn from the past.”   

Since hindsight bias makes tough decisions dependent on the future appear to be easier than they actually are, it can induce decision-makers to default their decisions to those favored by history and by the opinions of “expert” commentators.  At turning points in history or the financial markets, following popular opinion can have severe consequences, but being wrong in defying popular opinion presents real career risk.  

The economist John Maynard Keynes understood this dilemma.  He was not just possibly the most influential economic theorist of the 20th Century, but also a highly celebrated investor whose management of the Kings College, Cambridge Endowment Fund contributed to its massive growth.  Keynes convinced the Kings College board to permit the addition of equities to its fund invested exclusively in real estate.  Keynes reportedly bought out of favor stocks, often of smaller companies, and his returns reportedly exceeded the British stock market by about 8 percentage points per annum, an extraordinary achievement.  In spite of this success, at some point, Keynes felt compelled to observe to “it is better for reputation to fail conventionally than to succeed unconventionally.”  

Hindsight bias is a phenomenon that becomes familiar to all long-term professional investors.  Our best strategy to deal with it is to discuss with our clients why we are doing what we are doing, alongside an acknowledgment that there are plenty of times our investment choices simply may not work.  The future is unpredictable!  

At MONTAG, we recognize that investing is not about being perfect, but we adjust our decisions based on research, intellect, and probabilities to help put our clients and their portfolios in the best position for success. We have been doing this for over 40 years and our seasoned portfolio managers will continue to use their insights and discipline with the goal of creating successful outcomes with competitive returns.  

We will continue to study history while thinking ahead when we evaluate potential outcomes on your behalf. 

The information provided is for illustration purposes only.  It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.


  • Ned Montag

    As Chief Executive Officer of MONTAG, Ned has overall managerial responsibility for the firm. He joined the firm in 1996 and in 2009 became CEO. Ned’s managerial expertise, particularly in the family business context, was forged during his years as a member of the staff of the Family Business Forum in the Coles College of Business at Kennesaw State University. [email protected] Montag Ned