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Hindsight Bias, Risk Perception, and Investment Performance

Author

Listed:
  • Bruno Biais

    (Toulouse University, 31000 Toulouse, France)

  • Martin Weber

    (Lehrstuhl für Bankbetriebslehre, Universität Mannheim, 68131 Mannheim, Germany)

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

  • Bruno Biais & Martin Weber, 2009. "Hindsight Bias, Risk Perception, and Investment Performance," Management Science, INFORMS, vol. 55(6), pages 1018-1029, June.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:6:p:1018-1029
    DOI: 10.1287/mnsc.1090.1000
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    References listed on IDEAS

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