What is hindsight bias in marketing?

People’s actions are not always rational. Both important and un­im­port­ant decisions are made sub­con­sciously due to biases. These cognitive biases come in different forms: hindsight bias refers to the tendency to assess the pre­dict­ab­il­ity of an event dif­fer­ently in hindsight than before the event. This phe­nomen­on can be useful in marketing.

“Hindsight is always 20/20!” In hindsight, things can appear much clearer than they did be­fore­hand. Hindsight bias describes how pre­dict­ab­il­ity is over­es­tim­ated after an event. While the outcome of a situation might seem hard to predict be­fore­hand, the same situation appears clearer in ret­ro­spect. Hindsight bias may at first not appear to be par­tic­u­larly useful in marketing, but it can be highly relevant for business activ­it­ies.

Biases like hindsight bias usually involve several potential “sources of error”: our memories, per­cep­tion, thoughts, and judgement. Cognitive biases are sys­tem­at­ic errors people make, and have been demon­strated in multiple studies to be re­peat­able effects. Cognitive biases manifest in a variety of situ­ations. However, if companies are aware of these psy­cho­lo­gic­al effects, they can use them ef­fect­ively – in marketing or in other aspects of their business strategy.

Hindsight bias is a term used in cognitive psy­cho­logy. The first sys­tem­at­ic study of this cognitive bias was conducted in 1975 by the American risk re­search­er and decision theorist Baruch Fischhoff. Hindsight bias is more complex and multi-faceted than other biases. Based on what we currently know, it has three com­pon­ents. Ori­gin­ally, Fischhoff had started from the as­sump­tion that hindsight bias was a single error, but he later went on to describe two sub-aspects. The first is that the actual pre­dict­ab­il­ity of an event is over­es­tim­ated in hindsight. The second is that hindsight bias can also give you a false memory of having correctly predicted the event be­fore­hand. These two aspects can coincide and even strengthen hindsight bias.

Today, in addition to the “sub­sequently increased per­cep­tion of in­ev­it­ab­il­ity” and the “sub­sequently increased per­cep­tion of pre­dict­ab­il­ity,” “memory dis­tor­tion” is also believed to occur. These three com­pon­ents of hindsight bias can also manifest in­de­pend­ently of one another, so they are not ne­ces­sar­ily in­ter­de­pend­ent. Hindsight bias is not always easy to identify, since it’s para­dox­ic­al and its de­vel­op­ment occurs sub­con­sciously. For example, in hindsight an event is perceived as more in­ev­it­able but also less pre­dict­able than it was perceived be­fore­hand. You can find more in­form­a­tion about the current findings regarding the three aspects of hindsight bias in a study conducted by Hartmut Blank, Steffen Nestler, Gernot von Collani, and Volkhard Fischer.

Hindsight bias can be observed in situ­ations where pre­dic­tions and eval­u­ations of such pre­dic­tions are made. This fre­quently affects elections and election research, since hindsight bias occurs regularly with regard to political decisions. However, any processes that involve making pre­dic­tions may po­ten­tially be affected. This type of cognitive bias therefore also affects companies, in­sti­tu­tions, public au­thor­it­ies, and other types of or­gan­isa­tions. In addition, hindsight bias plays an important role in the assigning of re­spons­ib­il­ity or blame. There are many examples of hindsight bias in situ­ations where a person believes to be right, for instance.

The stock market provides a good example of such bias. In most cases, the prob­ab­il­ity of whether the price of a company’s shares will rise is highly un­pre­dict­able. However, if you happen to purchase stocks that generate a profit, hindsight bias will kick in. In hindsight, the decision will appear obvious, and you will con­grat­u­late yourself on your excellent un­der­stand­ing of the market.

However, hindsight bias also affects how negative de­vel­op­ments in the stock market are perceived. When stock prices drop dra­mat­ic­ally, experts will suddenly comment on how they sup­posedly had been expecting a negative trend for a long time. Yet, in most cases, few of these experts actually sold the position or hedged against a fall in stock prices.

These examples clearly il­lus­trate how hindsight bias can have an impact. There are two things that make hindsight bias par­tic­u­larly tricky in practice:

• Not even experts are immune to hindsight bias and over­es­tim­ate the pre­dict­ab­il­ity of events afterward. This fre­quently occurs within the his­tor­ic­al sciences.
• Your memory of what you pre­vi­ously knew about a topic is con­stantly changing – sub­con­sciously and im­per­cept­ibly – as it is subjected to new in­form­a­tion, reports, or as­ser­tions.

For marketing and other business divisions, hindsight bias is only relevant in­tern­ally. While not directly involved in customer com­mu­nic­a­tion, hindsight bias plays a role in decision-making: in making the right marketing com­mu­nic­a­tion strategy, the correct pre­dic­tions of market trends, the best crisis man­age­ment plan, and other decisions or state­ments that require someone to take re­spons­ib­il­ity. The following are three examples of state­ments that strongly indicate hindsight bias:

• “I don’t remember saying that.”
• “Anyone could have seen this coming.”
• “I told you this was bound to happen.”

While hindsight bias is complex, it is re­l­at­ively easy to detect its mani­fest­a­tion in language. In conflict situ­ations (e.g. regarding poor marketing decisions), it is def­in­itely worth taking a step back to talk about whether hindsight bias played a role and what influence it may have had.

When it comes to sales promotion, however, hindsight bias can be used in any situation where customers over­es­tim­ate them­selves. Another important aspect is that people are always looking to validate their own world view and values, but in doing so, get bogged down in the details and lose sight of the bigger picture. That’s why consumers find modest product ranges ad­vert­ised with clear marketing messages more ap­proach­able, es­pe­cially when the com­mu­nic­ated values are shared by many people.

Hindsight bias has been sci­en­tific­ally proven, but the debate around this cognitive bias is still con­ten­tious. There are two sides to this argument. One side argues that hindsight bias is dangerous because it makes it harder to learn from one’s own mistakes due to incorrect pre­dic­tions and as­sump­tions. The other side argues that hindsight bias is a useful mental mechanism to reward us through self-delusion, “disposes” of un­ne­ces­sary in­form­a­tion, and helps us learn via sim­pli­fied caus­al­it­ies.