What you need to know about hindsight bias, luck and house prices

Behavioural finance has made some great contributions to our ability to understand why people make decisions. A lot of the findings are around the rationalisation of outcomes in people’s lives. As people succeed or fail, they are increasingly likely to either blame others for their failures or point solely to their hard work as the determinant of their success. They basically make up a story that enables them to live with themselves.

Hindsight bias is sometimes called the “knew it all along” syndrome. The ability of many to point to house prices and compare two data points (price paid, current market value) without accounting for any of the explicit costs and more importantly compare the opportunity cost across a feasible set of alternative investment options throughout the holding period are a great reason why people should tune out of the “home truths” and “housing crisis” nonsense journalists are writing about.

I’m finding this whole thing quite amusing because one of my favourite economists Robert Frank was interviewed by Russ Roberts on Econtalk the other week talking exactly about this sort of stuff! The interview is obviously a good boost for his book “Success and Luck: Good Fortune and the Myth of Meritocracy“.

The premise of the book is that a lot of people totally ignore how lucky they actually are and deny that good fortune played any part in their success. This affects their attitude towards people who are less fortunate than they are. Obviously, hard work is like a multiplier on good fortune, some people blow up any opportunities they are offered but other people figure out the size or scale of the opportunity and are able to leverage that into a positive outcome for themselves and society at large.

But the part of the interview that I’d link back to all of this drama and over-sharing about ability or inability to “get on the property ladder” is that the whole point – relative socio-economic status – has been omitted from the discussion. When will a journalist really dig into how these people feel? Why are they talking about their degrees instead of talking about their genuine economic value add in the brave new world where robots are coming for everyone?