Quote for the Week
Hindsight occurs when a surprising event takes place and the surprise is very brief, replaced almost immediately by a need to make sense of it. The individual has learned something from the event. For example, if there were two football teams that you considered equally-matched, and one of them trumps the other 5-0, they are no longer equally strong in your mind. One of them is clearly better than the other. This makes sense of their victory. It also makes it virtually impossible for you to re-construct that, earlier, you thought they were equal.
Now, we think that the team that actually won “had to win.” Why did it have to win? Because it won. It won because it was stronger. How do we know it is stronger? Because it won. This is hindsight. It has a huge effect on our thinking, it has a huge effect on investing behaviour, and it has a very pernicious effect, in that it teaches us something quite wrong about the nature of reality…
Now, an example of that, of course, is the Great Recession. There are many people who predicted the Great Recession – there are many more now than there were then. The film The Big Short was based on a book, written by Michael Lewis. The book really invites you to hindsight. There are a few people – they are obviously very clever people, and they knew that the market was going to crash. And you can’t help but get the feeling that the people who didn’t know the market was going to crash were either fools or knaves. Intelligent people saw the recession coming. But in fact, and that is a well-known fact, many highly intelligent and well-informed people did not anticipate the crash. The conclusion is that the crash was not quite as predictable as it now appears. It now appears highly predictable, in hindsight.
So, the pernicious effect of hindsight is that we get the sense, after the fact, that an event was predictable, so we get the sense that the world is predictable. We think the world makes sense, and that exaggeration of the coherence, consistency and predictability of the world means that we deny the real uncertainty with which we are faced in existence. And this denial of uncertainty in turn produces irrational action. — Daniel Kahneman (source)