“Everyone knew Trump would win all along,” writes Barry Ritholtz in last week’s BloombergView, arguing that such hindsight bias “haunts investors constantly.” Specifically, he explains, the human brain creates “stories after the fact to conform with what we now know.”
Ritholtz uses the examples of; (1) the financial crisis, and how many people claimed (after the fact) to have seen it coming, and (2) the throngs of folks who say they predicted the success of Amazon, Google, Facebook and Apple. “These folks are fooling themselves,” says Ritholtz.
Why? He explains that the brain is wired to “make sense of a world filled with random events,” as a way of coping with chaos and, from an evolutionary standpoint, ensuring survival of the species. He illustrates by citing the chain of events leading up to the FBI’s investigation into former congressman Anthony Weiner’s scandalous conduct and its timing relative to the presidential election.
“This could have happened months earlier and been forgotten and overtaken by other events,” writes Ritholtz, asserting that “it all seems, at some level, to make sense after the fact. His conclusion: “Investors should take note.”