Fraud by Hindsight

61 Pages Posted: 22 Feb 2005

See all articles by Mitu Gulati

Mitu Gulati

University of Virginia School of Law

Jeffrey J. Rachlinski

Cornell Law School

Donald C. Langevoort

Georgetown University Law Center


In securities-fraud cases, courts routinely admonish plaintiffs that they are not permitted to rely on allegations of "fraud by hindsight." In effect, courts disfavor plaintiffs' use of evidence of bad outcomes to support claims of securities fraud. Disfavoring hindsight evidence appears to tap into a well known, well-understood, and intuitively accessible problem of human judgment of "20/20 hindsight." Events come to seem predictable after unfolding, and hence, bad outcomes must have been predicted by people in a position to make forecasts. Psychologists call this phenomenon the hindsight bias. The popularity of this doctrine among judges deciding securities cases suggests that judges actively seek techniques that enable them to correct for psychological biases that might otherwise affect their decision-making.

This paper assesses the hypothesis that judges have adopted the "fraud-by-hindsight" doctrine so as to avoid erroneous judgment infected with the hindsight bias. We find that although judges have identified a real problem in human judgment, they are not developing a doctrine to remedy the influence of hindsight on judgment. Rather, they are using this problem of human judgment as the justification for expanding their authority to manage the complex, high-stakes securities cases that come before them. The result provides judges with the greater case-management authority they seek, but leaves the securities litigation without a meaningful doctrine to ameliorate the influence of hindsight on judgment.

JEL Classification: K0, K2

Suggested Citation

Gulati, Mitu and Rachlinski, Jeffrey John and Langevoort, Donald C., Fraud by Hindsight. Available at SSRN: or

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Jeffrey John Rachlinski

Cornell Law School ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States
607-255-5878 (Phone)
607-255-7193 (Fax)

Donald C. Langevoort

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9832 (Phone)
202-662-9412 (Fax)

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