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How to cope with a client’s hindsight-bias

Hindsight bias is the tendency to predict that an event was inevitable, after it has occurred. It is also known as the “I-know-it-all-along” effect. For example, an investor will think once every month for 10 years that a financial crash would be coming. And, when the crash does hit the market, they feel they knew-it-all-along. This phenomena of believing that they knew it would happen, causes the person to become over-confident and over-estimate their insights or judgments to predict future events with some accuracy.

Hindsight bias also hinders in taking sound financial decisions as the person is over-confident about his ability to know-it-all, which leads to overconfidence. Often, it also affects the client and advisor relationship. When the decisions do not bear the fruits as expected, often it is blamed on the financial advisor for their incapability to predict the outcome, which could affect the relationship with the client and make them lose confidence in the advisor’s abilities.

In the investment space or stock market, it is rarely possible to predict an outcome of a decision taken at a certain point. Whether the decision was good or bad, could be only determined after a certain period or upon its returns.

If your client has hindsight bias, consider the following pointers below to aid sound decision making and nurturinglong-term relationship.


Be aware

The first step to prevent making decisions due to hindsight bias is to be aware that it exists. Even the seasoned and most experienced investors cannot predict or forecast how a particular investment would fare in the years coming ahead. Hence, it is important to base your decision on sound analysis of the investment portfolio and balancing out risk and returns rather than relying on hindsight bias to aid in decision-making.


Learning from past mistakes

Hindsight bias dissuades investors from improving their business acumen by learning from their past investment decisions. Maintaining records of investment forecast along with their reasoning can help in preventing making decisions influenced by hindsight bias. In addition, by evaluating previous investment decisions and their performance, financial advisors can counsel their clients to make sound investment decisions. Gaining insight into their past investment choices and learning from thoseexperiences will help investors get a clearer and more balanced picture while making decisions. Focusing on the positives as well as the negativeswould help the investors avoid over-confidence influence their investment decisions.


Engaging a financial expert

Alternatively, engaging a professional investment manager to invest in managed fund would prove to be a wise move. Their expertise and guidance can help in preventing decisions made due to hindsight bias.