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Cognitive biases - the hindsight bias


Cigarbutt
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This is another bias that I try to neutralize.

When things (investments) don't turn out the way they were expected, many outcomes are possible in terms of feedback.

One way is to re-write history and to do selective information recall. The "I knew it all along" line when, in fact, this was not the case.

This is a common and largely unconscious bias that "helps" to prevent blame and "helps" to promote the ego.

May lead to false conclusions and unfortunately to over-confidence. Dangerous game.

 

When I look back at the 2007-9 episode, I happened to be on the right side of many trades. Part of my thinking wants to attribute most of this to rational analysis.

Wrong.

 

After the 2007-9 period, I felt that the debt overhang would cause high yield debt spread to spike and remain elevated in a deleveraging environment.

 

https://fred.stlouisfed.org/series/BAMLH0A0HYM2              -click MAX

 

Wrong again. I need to look at alternative explanations.

 

Also, sometimes, you may be "right" for the wrong reasons and "wrong" for the right reasons.

 

Investing is fascinating. Isn't it?

 

 

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I think this one could be the result of laziness or intellectual dishonesty or a combo of both.

 

Hey, a gain is a gain, right? (don't look a gift horse in the mouth.)

 

or

 

Jeez, how could I have possibly seen that coming (just sweep it under the rug & move on.)

 

I have been guilty of both (in the past...) but my feet are held to the fire by COBF & Twitter (mainly COBF because of the disgustingly high level of integrity displayed by members.)

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Guest cherzeca

The market is not only uncertain ex ante but profoundly unknowable ex poste. Assessing causation to outcome is just another heuristic and the psychological forces that cigarbutt refers to are very powerful. IMO the cmost analyzable trade I can make is a pairs trade based upon competitive factors but even here reversion to mean can frustrate a "correct" competitive analysis. Tough game investing

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