Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why You Think You Can Predict the Future
Transcript
- Lucas: So here is a thought experiment. I'm going to describe a real historical event, and I want you to think about how likely you would have thought it was before it happened. Luna: Okay, I'm ready. Hit me. Lucas: In 1914, Archduke Franz Ferdinand is assassinated in Sarajevo. One month later, Europe is at war. World War One. Now, after the fact, it seems almost inevitable, right? The alliances, the tensions, the arms race. But before it happened, most people thought a major European war was extremely unlikely. In fact, the British economist Norman Angell had just published a bestseller arguing that war was economically impossible. Luna: Right, because trade had made it too costly. And then it happened anyway. So my brain is already saying, 'Well, of course it was going to happen.' But you're telling me that's a bias. Lucas: Exactly. That's the hindsight bias. Also called the 'I-knew-it-all-along' effect. It's our tendency to see past events as more predictable than they actually were. Once we know the outcome, we reconstruct our memory of our own predictions to fit what happened. Luna: So it's not just that we think we saw it coming. We actually misremember what we thought. Lucas: Right. And the classic study on this comes from Baruch Fischhoff in 1975. He gave participants descriptions of historical events — like the war between the British and the Gurkhas in 1814 — and asked them to rate the probability of each possible outcome. Some participants were told the actual outcome. Others were not. Luna: And what did he find? Lucas: The people who were told the outcome consistently gave higher probability estimates to that outcome. They said it was more likely, even though they were supposed to be judging what they would have thought without knowing. Fischhoff called it 'creeping determinism' — the sense that what happened was inevitable. Luna: So once you know the ending, you can't un-know it. And that distorts your judgment. Lucas: Precisely. And this matters enormously in business and finance. Think about any post-mortem after a failed project. Everyone says, 'I knew that wasn't going to work.' But if they really knew, why didn't they speak up? The hindsight bias lets us claim foresight we never had. Luna: It also makes us worse at learning. If you think you already knew the outcome, you don't bother to analyze why it really happened. Lucas: That's the real danger. The bias robs us of the lessons of experience. If every mistake feels like something you already saw coming, you never update your mental model. You stay overconfident. Luna: And overconfidence is a classic behavioral bias on its own. So hindsight bias feeds into that. Lucas: Exactly. There's a famous example from the 2008 financial crisis. After the collapse of Lehman Brothers, plenty of people said, 'Anyone could have seen that coming.' But in 2007, very few did. The housing market had been booming for years. The CDO machine was churning. Most economists were predicting a soft landing. Luna: And after the fact, the narrative becomes this inevitable disaster, which makes it harder to spot the next one. Lucas: Right. So how do you fight it? One tool is to keep a decision journal. Before you make a big call — an investment, a hire, a product launch — write down your prediction and your reasoning. Then, when the outcome is known, you can compare what you actually thought versus what your memory tells you. Luna: That's what a lot of professional investors do. They record their thesis at the time of purchase, and later they audit it. Lucas: Exactly. It's humbling. You realize how often you were confident and wrong. And that's the cure for hindsight bias: confronting your actual track record, not your reconstructed one. Luna: So the next time you hear someone say 'I knew it all along,' you can gently ask them, 'Did you write it down?' Lucas: That's the perfect question. And that's actually a good segue to something I wanted to mention. This show is ad-free, and it's made possible entirely by listeners who find value in it. If you've ever had one of those 'aha' moments while listening — where something clicked about your own decisions or the economy — then you know what I mean. Luna: Yeah, and it doesn't take much. A couple of dollars a month is genuinely what keeps these going. Lucas: If that's you, you can support the show at buy me a coffee dot com slash fexingo. And we really appreciate it. Luna: Alright, back to hindsight bias. You mentioned decision journals. Is there any research on whether they actually reduce the bias? Lucas: There is. A study by Tetlock and Gardner in the book 'Superforecasting' found that the best forecasters kept detailed records of their predictions and regularly updated their beliefs based on new evidence. They were also less susceptible to hindsight bias because they had concrete evidence of their own errors. Luna: So it's not just about being humble. It's about creating a system that forces you to confront reality. Lucas: Exactly. And there's another interesting implication. Hindsight bias can make you a worse leader. If you always act like you predicted the outcome, your team stops bringing you bad news. They assume you already know. That's how organizations miss warning signs. Luna: So the best leaders might be the ones who say, 'I didn't see that coming. Let's figure out why.' Lucas: Exactly. Acknowledging surprise is a strength, not a weakness. It opens the door to learning. Luna: One area where hindsight bias seems really pernicious is in political punditry. You see commentators on TV saying, 'It was obvious that the election would go this way,' when pre-election polls showed a toss-up. Lucas: Right, and they never get called out because the news cycle moves on. But if you go back and look at their actual predictions, they're often wrong. The hindsight bias lets them rewrite history. Luna: So what about in our own lives? How do we avoid it day-to-day? Lucas: The simplest trick is to ask yourself, before you look up an outcome, 'What do I think will happen? And what evidence would change my mind?' That forces you to articulate a prediction before you know the result. Luna: That's the opposite of hindsight bias. It's foresight with accountability. Lucas: Exactly. And it's a skill you can practice. Every time you read a news headline, pause and ask: 'What do I expect the article to say? What's my prediction?' Over time, you get better at calibrating your confidence. Luna: I'm going to try that. It sounds like a good habit. Lucas: It is. And it's one of the few biases where the cure is genuinely simple: write it down. That's the whole thing. Luna: Alright, so to wrap up: hindsight bias makes the past seem inevitable, distorts our learning, and fuels overconfidence. The antidote is to record your predictions before you know the outcome. Lucas: That's the takeaway. Next time, we'll look at another bias that messes with how we perceive risk: the availability heuristic. Until then, keep writing things down.