What is Hindsight Bias?
Quick Answer: Hindsight bias makes traders believe they “knew it all along,” warping performance reviews and encouraging reckless overconfidence.
Understanding Hindsight Bias
Hindsight bias occurs when traders believe they “knew it all along” after events unfold. This distorts performance reviews and leads to overconfidence.
How It Hurts Performance
Hindsight bias obscures lessons from losing trades and inflates trust in flawed setups. Traders misremember their original reasoning, convince themselves that outcomes were obvious, and fail to refine their process. Over time this leads to sloppy risk management and poor adaptation to changing markets.
Defensive Habits
Record pre-trade plans in your trading journal. Compare outcomes to original expectations to highlight gaps between plan and reality.
Encouraging Objective Reviews
- Post-trade audits: Use expectancy, drawdown, and Sharpe ratio to evaluate performance.
- Peer feedback: Discuss trades with mentors who can challenge “I knew it” narratives.
- Snapshot evidence: Capture charts and notes before entry to preserve your original thesis.
Narrative Fallacy
Markets are messy. Believing outcomes were predetermined encourages overconfidence, excessive leverage, and reduced adaptability.
Combat hindsight bias by celebrating disciplined trades regardless of outcome, and by focusing reviews on process adherence, not profit alone. The goal is to learn from what actually happened, not to rewrite history.
Related Terms
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