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.
What is hindsight bias 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.
Hindsight bias: Hindsight bias describes the judgement error people make when looking back on a situation. People tend to judge a critical situation much more accurately in hindsight than they would have beforehand.
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.
The theory: how does hindsight bias work?
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.
Practical example of hindsight bias
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 organizations. 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.
Hindsight bias in marketing
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.
There are other types of cognitive biases that can be useful in marketing. For example, understanding the IKEA effect, the anchoring effect, confirmation bias, and survivorship bias can produce great results.