The start of a new year is a typical time to reflect on what you completed in 2021 and what you are looking forward to in 2022. A really good personal year end review agenda by Getting Things Done can be found here.
It can also be an ideal time for to be honest with yourself and ask, “do I suffer from hindsight bias”?
What is hindsight bias?
Hindsight bias is when you reflect on an event and believe you could have forecast the outcome.
As a result, many people believe their judgment is better than it is. The idea is, that once you know the outcome it’s much easier to construct a believable explanation. With this, you become less critical of your decisions, leading to poor decision-making in the future.
Why is this relevant to you, as an investor?
You may feel pressure to perfectly time the buying of any investment to maximize your investment return. If you subsequently suffer a loss, you may regret not acting earlier. With regret comes the thought that you saw it coming all along.
In fact, it was one of the many possibilities that you might have anticipated. Whichever one of them pans out, you become convinced that you saw it coming.
Avoiding hindsight bias involves being able to make predictions beforehand, such as keeping a decision-making journal, allowing the investor to compare later.
So to help you avoid hindsight bias, we’re recommending you keep a record of the following values and forecasts.
On December 31st 2022, what is your best guess for the following.
- The closing value of the FTSE 100 Share Index (31/12/2021 – 7384)
- The total return (Index increase plus any reinvested dividends) of the FTSE 100 (2021 Total return was 18.44%)
- Bank of England Base rate (Interest Rate – Currently 0.25%)
- UK inflation rate for 2022 (Currently 5.1%)
- The price of Bitcoin (31/12/21 – $46,306)
- The price of Gold (31/12/21 – $1,817)
- The top performing asset of 2022 (Property, Shares, Cash etc…)
Better still, email us with your forecasts and we’ll keep a log and go through the same reflective exercise in January 2023, to try and help us all avoid saying “I knew that would happen”!
If you have a question about this article or your investment, please call us on 01825 76 33 66 or complete the form below.
