Consider the following situation. As a manager, you are debating the launch of a new product that your company has been working on for several months. After considerable analysis, you decide to launch the product. Despite your best efforts, the product fails. In a follow-up meeting, another manager discloses how he knew all along that the product was destined for failure. To support his assertion, he presents three powerful reasons as to why the failure was inevitable. As you review his reasoning, it becomes obvious to you that his points do have merit. You wonder why you didn’t see it coming and got completely blindsided by the eventual outcome.
Every once in a while, we find ourselves in situations where we are told by someone, or we personally get this feeling, that the observed outcome was almost inevitable. Why are we consistently unable to anticipate the “inevitable” before we make a decision? Why does this clarity of thought come to us only after an event’s outcome has unfolded? This happens because of what is commonly called the hindsight bias. We have a tendency to exaggerate what could have been anticipated in foresight. In other words, when we know the outcome, we start believing that the outcome was inevitable and it would have been easy to predict that outcome in advance.
In a classic study, when subjects were given a statement (such as, “People spend a greater proportion of their incomes during a boom than during a recession”), most subjects responded with something such as “I would have predicted that.” However, when subjects were given statements that were direct opposites of the original statements, subjects still responded with the same certitude that “I would have predicted that”. In retrospect, we tend to assign an “inner necessity” to the perceived logic of unfolding events. We get this impression that things could not have unfolded in any other fashion. This phenomenon is so strong that people will even incorrectly remember their own predictions after they observe a given outcome. For example, before a product launch, a manager might have placed an 80% chance of the launch’s success, but after witnessing the failure, he may incorrectly lower the expected success rate as he tries to recollect his own prediction! Events appear far more obvious and predictable in hindsight than they do beforehand.
After an event has happened, we tend to easily identify the factors that contributed to the eventual outcome, and fail to recall all the other forces that could have led to other outcomes. Thus, in hindsight the outcome seems very obvious and easy to explain. But, when we are making a decision (without the benefit of any hindsight), we have to consider all the forces that are at work and that could lead to different outcomes. We do not have the luxury of knowing in advance which forces will dominate others. This difference in perspective creates the imbalance between foresight and hindsight.
So, what are some of the managerial implications of the hindsight bias? First, be wary of post hoc explanations of how some managers “knew it all along”. They are simply being victims of hindsight bias and are mistaken about the certainty with which they think they knew this was coming. Second, in order to counter such post hoc assertions, you should ask others to predict the probabilities of different outcomes as the decisions are being made. This will not only get rid of the post hoc blaming game but can also help assess the likelihood of different outcomes more objectively. Third, one can use the hindsight bias to one’s advantage by engaging in an exercise called “prospective hindsight”. In this exercise, you assume that a particular outcome has materialized, and you then ask decision-makers to come up with reasons and arguments as to why that might have happened. In research studies, subjects are able to come up with richer and more numerous explanations of why an event might happen when they are told to imagine that the event has actually happened. Thus, if you are about to launch a new product, instead of looking for reasons why the product may be a big hit, ask your team to assume that it is one year from now and you know that the product has failed. Given that scenario, ask them to come up with reasons as to why the product didn’t succeed. This perspective has a better chance of yielding insights into potential trouble spots. Finally, if you get a feeling that you should have “seen it coming” after a decision turns out to be a bad one, don’t berate yourself. What you can now see in hindsight wasn’t that obvious in foresight!
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Praveen Aggarwal is an associate professor of marketing at the Labovitz School of Business and Economics at the University of Minnesota Duluth and Rajiv Vaidyanathan is a professor of marketing and director of MBA programmes at the University of Minnesota Duluth.