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Hindsight Bias, Risk Perception, and Investment Performance

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  • Biais Bruno

    (CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Martin Weber

Abstract

Once 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

Suggested Citation

  • Biais Bruno & Martin Weber, 2009. "Hindsight Bias, Risk Perception, and Investment Performance," Post-Print halshs-00491137, HAL.
    • Handle: RePEc:hal:journl:halshs-00491137
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