Hindsight Bias, Risk Perception and Investment Performance

Management Science, Vol. 55, No. 6, pp. 1018-1029, June 2009

Posted: 9 Aug 2008 Last revised: 2 Jul 2009

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: June 2009

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 67 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 and Weber, Martin, Hindsight Bias, Risk Perception and Investment Performance (June 2009). Management Science, Vol. 55, No. 6, pp. 1018-1029, June 2009, Available at SSRN: https://ssrn.com/abstract=1209774

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Martin Weber (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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