Q&A bank 2 says that hindsight bias could be a cause of overconfidence. I can't see this -can anyone explain please?
The hindsight bias is that, after an event, people think that the event was more predictable than it actually was. If you think that the past was more predictable than was actually the case, this can give you a false confidence in the future i.e. if you have less memory of unexpected events, you think they are less likely to happen in future, or that you'll be able to spot them in plenty of time. For example, if you look at house prices, the general trend is good returns over the long term, with some short term big crashes. This might make an investor wary of being involved in one of those crashes. However, if the investor had a hindsight bias about those crashes, and thought that they were pretty obvious and easy to spot, then they would have greater confidence in their property investment, than if they thought that the crashes were totally random.
I do not know if ST5 covers something called stress-testing, so my explanation will be in English and not jargon. Stress testing is a financial practice that says;-after repairing a bridge you test it by looking for the biggest truck that has ever existed (usually the one that broke the last bridge) and place it on the bridge, if it doesn't break you are considered to be the better guy than the one who built the previous bridge. Then other road - construction companies hire you, until YOU GET A BIGGER TRUCK THAN THE ONE YOU KNOW PASSING THROUGH that bridge. P.s you can also think about it in terms of the organic (due to more uncertainty), the biggest animal you remember is probably a dinosaur, so u test the bridge by a dinosaur, then something bigger than a dinosaur passes(out of nowhere) and then crushes the bridge. Hope it helps.
