Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.
I have heard of too many people who “knew well before it happened that the 2008 financial crisis was inevitable.” This sentence contains a highly objectionable word, which should be removed from our vocabulary in discussions of major events. The word is, of course, knew. Some people thought well in advance that there would be a crisis, but they did not know it. They now say they knew it because the crisis did in fact happen. This is a misuse of an important concept. In everyday language, we apply the word know only when what was known is true and can be shown to be true. We can know something only if it is both true and knowable. But the people who thought there would be a crisis (and there are fewer of them than now remember thinking it) could not conclusively show it at the time. Many intelligent and well-informed people were keenly interested in the future of the economy and did not believe a catastrophe was imminent; I infer from this fact that the crisis was not knowable. What is perverse about the use of know in this context is not that some individuals get credit for prescience that they do not deserve. It is that the language implies that the world is more knowable than it is. It helps perpetuate a pernicious illusion.
The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do. Know is not the only word that fosters this illusion. In common usage, the words intuition and premonition also are reserved for past thoughts that turned out to be true. The statement “I had a premonition that the marriage would not last, but I was wrong” sounds odd, as does any sentence about an intuition that turned out to be false. To think clearly about the future, we need to clean up the language that we use in labeling the beliefs we had in the past.
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The mind that makes up narratives about the past is a sense-making organ. When an unpredicted event occurs, we immediately adjust our view of the world to accommodate the surprise. Imagine yourself before a football game between two teams that have the same record of wins and losses. Now the game is over, and one team trashed the other. In your revised model of the world, the winning team is much stronger than the loser, and your view of the past as well as of the future has been altered by that new perception. Learning from surprises is a reasonable thing to do, but it can have some dangerous consequences.
A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world (or of any part of it), you immediately lose much of your ability to recall what you used to believe before your mind changed
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Hindsight bias has pernicious effects on the evaluations of decision makers. It leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad. Consider a low-risk surgical intervention in which an unpredictable accident occurred that caused the patient’s death. The jury will be prone to believe, after the fact, that the operation was actually risky and that the doctor who ordered it should have known better. This outcome bias makes it almost impossible to evaluate a decision properly—in terms of the beliefs that were reasonable when the decision was made.
Hindsight is especially unkind to decision makers who act as agents for others—physicians, financial advisers, third-base coaches, CEOs, social workers, diplomats, politicians. We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact. There is a clear outcome bias. When the outcomes are bad, the clients often blame their agents for not seeing the handwriting on the wall—forgetting that it was written in invisible ink that became legible only afterward. Actions that seemed prudent in foresight can look irresponsibly negligent in hindsight. Based on an actual legal case, students in California were asked whether the city of Duluth, Minnesota, should have shouldered the considerable cost of hiring a full-time bridge monitor to protect against the risk that debris might get caught and block the free flow of water. One group was shown only the evidence available at the time of the city’s decision; 24% of these people felt that Duluth should take on the expense of hiring a flood monitor. The second group was informed that debris had blocked the river, causing major flood damage; 56% of these people said the city should have hired the monitor, although they had been explicitly instructed not to let hindsight distort their judgment.
The worse the consequence, the greater the hindsight bias. In the case of a catastrophe, such as 9/11, we are especially ready to believe that the officials who failed to anticipate it were negligent or blind. On July 10, 2001, the Central Intelligence Agency obtained information that al-Qaeda might be planning a major attack against the United States. George Tenet, director of the CIA, brought the information not to President George W. Bush but to National Security Adviser Condoleezza Rice. When the facts later emerged, Ben Bradlee, the legendary executive editor of The Washington Post, declared, “It seems to me elementary that if you’ve got the story that’s going to dominate history you might as well go right to the president.” But on July 10, no one knew—or could have known—that this tidbit of intelligence would turn out to dominate history.
Because adherence to standard operating procedures is difficult to second-guess, decision makers who expect to have their decisions scrutinized with hindsight are driven to bureaucratic solutions—and to an extreme reluctance to take risks. As malpractice litigation became more common, physicians changed their procedures in multiple ways: ordered more tests, referred more cases to specialists, applied conventional treatments even when they were unlikely to help. These actions protected the physicians more than they benefited the patients, creating the potential for conflicts of interest. Increased accountability is a mixed blessing.
Although hindsight and the outcome bias generally foster risk aversion, they also bring undeserved rewards to irresponsible risk seekers, such as a general or an entrepreneur who took a crazy gamble and won. Leaders who have been lucky are never punished for having taken too much risk. Instead, they are believed to have had the flair and foresight to anticipate success, and the sensible people who doubted them are seen in hindsight as mediocre, timid, and weak. A few lucky gambles can crown a reckless leader with a halo of prescience and boldness.
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The CEO of a successful company is likely to be called flexible, methodical, and decisive. Imagine that a year has passed and things have gone sour. The same executive is now described as confused, rigid, and authoritarian. Both descriptions sound right at the time: it seems almost absurd to call a successful leader rigid and confused, or a struggling leader flexible and methodical.
Indeed, the halo effect is so powerful that you probably find yourself resisting the idea that the same person and the same behaviors appear methodical when things are going well and rigid when things are going poorly. Because of the halo effect, we get the causal relationship backward: we are prone to believe that the firm fails because its CEO is rigid, when the truth is that the CEO appears to be rigid because the firm is failing. This is how illusions of understanding are born.
