The Hindsight Bias Effect and Investment Decision Making

Tchai Tavor
The Max Stern Yezreel Valley College

Abstract

One of the main problems facing investors is the incorrect tendency to believe in their ability to predict the performance of financial assets based on past performance. This article investigates the phenomenon of hindsight bias for data in the capital market, and in particular it examines the ability to make investment decisions for the short term based on Fischhoff's article (1975). In the experiment, each respondent was given a sum of money which he was supposed to invest in various financial assets based on their historical yield charts. The study examined two main tests, the first is whether there is a difference in the hindsight bias effect for different types of events, and the second is whether women are more led than men in making decisions. From the results of the first test, it was found that the average hindsight bias effect is positive and significant, and the performance of the test group is on average higher than the performance of the control group. From the results of the second test, strong evidence was obtained that the hindsight bias of women is higher than that of men in all types of events.

Presentation