Hindsight Bias, Risk Perception and Investment Performance
AbstractOnce they have observed information, hindsight-biased agents fail to remember how ignorant they were initially; "they knew it all along." We formulate a theoretical model of this bias, providing a foundation for empirical measures and implying that hindsight-biased agents learning about volatility will underestimate it. In an experiment involving 66 students from Mannheim University, we find that hindsight bias reduces volatility estimates. In another experiment, involving 85 investment bankers in London and Frankfurt, we find that more biased agents have lower performance. These findings are robust to differences in location, information, overconfidence, and experience.
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Bibliographic InfoPaper provided by University of Toulouse 1 Capitole in its series Open Access publications from University of Toulouse 1 Capitole with number http://neeo.univ-tlse1.fr/481/.
Date of creation: Jun 2009
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Publication status: Published in Management Science (2009-06) v.55, p.1018-1029
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Other versions of this item:
- Bruno Biais & Martin Weber, 2009. "Hindsight Bias, Risk Perception, and Investment Performance," Management Science, INFORMS, vol. 55(6), pages 1018-1029, June.
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- Franses, Philip Hans & Legerstee, Rianne, 2013. "Do statistical forecasting models for SKU-level data benefit from including past expert knowledge?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 80-87.
- David Danz & Frank Hüber & Dorothea Kübler & Lydia Mechtenberg & Julia Schmid, 2013.
"‘I'll do it by myself as I knew it all along’: On the failure of hindsight-biased principals to delegate optimally,"
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SFB649DP2013-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Danz, David & Hüber, Frank & Kübler, Dorothea & Mechtenberg, Lydia & Schmid, Julia, 2013. "'I'll do it by myself as I knew it all along': On the failure of hindsight-biased principals to delegate optimally," Discussion Papers, Research Unit: Market Behavior SP II 2013-203, Social Science Research Center Berlin (WZB).
- Madarasz, Kristof, 2008. "Information projection: model and applications," MPRA Paper 38612, University Library of Munich, Germany, revised 2011.
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