Hindsight Bias: Examining Its Impact on Decision-Making and Advisor Trust

Hindsight bias, a cognitive distortion that alters perceptions of predictability after an event occurs, plays a crucial role in investment decision-making and trust in financial advisors. By making past events appear more foreseeable than they were, hindsight bias can distort financial judgments, increase overconfidence, and erode trust in professional advisors. This thesis investigates the extent to which hindsight bias influences financial behavior in hypothetical investment scenarios. The research addresses two key questions:

• Does hindsight bias change the financial decision-making of private investors in hypothetical investment scenarios compared to individuals not affected by hindsight bias?
• Do private investors who exhibit hindsight bias show altered levels of trust in financial advisors when receiving investment suggestions in hypothetical scenarios, compared to those not affected by hindsight bias?

A quantitative, scenario-based survey experiment was conducted to measure hindsight bias and its effects on decision-making and trust. Participants were randomly assigned to control and treatment groups. The control group evaluated investment scenarios without knowing the outcomes, while the treatment group received outcome knowledge before reassessing their initial decisions. This design allowed for a comparative analysis of decision-making shifts influenced by hindsight bias. The study applied non-parametric statistical methods, including Mann-Whitney U and Wilcoxon Signed-Rank tests, to examine differences in recall accuracy, investment behavior, and perceived advisor competence.

The findings indicate that hindsight bias significantly disrupts decision-making consistency, leading to distorted recall and increased volatility in investment behavior. Investors exposed to hindsight bias misremember their initial expectations, believing financial results were more predictable than originally assessed. This effect is most pronounced when investment outcomes are negative, as participants are more likely to revise their past judgments and adjust their future decisions.

Furthermore, hindsight bias negatively impacts trust in financial advisors, reducing perceived competence and trustworthiness when investments perform poorly. However, in scenarios where investments succeed, trust in advisors remains stable. This suggests that hindsight bias interacts with outcome valence, reinforcing negative evaluations while leaving positive assessments unaffected.

These findings highlight the practical implications for financial advisory services. Strategies such as improving client communication, implementing structured decision-tracking mechanisms, and employing behavioral finance interventions may help mitigate hindsight bias and preserve trust in financial relationships.