Fighting Hindsight Bias in White-Collar Investigations

by Nicolas Bourtin

Hindsight is 20-20. Ask any quarterback, risk manager, or meteorologist. What happened in the past often seems to have been inevitable—and eminently predictable.

This is more than folk wisdom. Decades of psychological research have proven the universal tendency not only to look for evidence to confirm a conclusion you have already reached, but also to greatly overestimate how foreseeable an outcome was once you know that the outcome has taken place. The effects of this phenomenon—known by psychologists as hindsight bias—are particularly significant in criminal investigations and in white collar investigations most of all. The problem is not insoluble, but solving it requires a broader awareness of hindsight bias, a greater understanding of the depth and dimensions of the issue among the white collar community, and consideration of the range of potential solutions.

Hindsight bias infects white collar investigations so meaningfully for two principal reasons. First, when it comes to financial fraud, guilt or innocence turns not on what a defendant did, but on the defendant’s intent in doing it. That intent must usually be inferred from an ambiguous factual record.  The result is that innocent mistakes, poor judgment, or even negligence can look like intentional conduct when viewed through the magnifying lens of hindsight.

Worse, the notoriety of an extreme event has an outsized impact on what inferences criminal investigators draw about the mental state of the persons involved. As discussed below, empirical studies have shown that the more negative the outcome, the more pronounced the hindsight bias.

Empirical studies have repeatedly shown that hindsight bias affects the judgment of both experts and laypeople in everything from medical diagnoses to military strategizing.  When “mock jury” studies equally divide evaluators into a “foresight group” that does not know the eventual outcome  and a “hindsight” group that does, the latter consistently views the outcome as more likely and the defendant as more culpable. And, again, the more negative the outcome, the more pronounced the bias.

Given the prevalence of hindsight bias in white collar criminal enforcement, the law’s failure to adapt is regrettable.  Any strategy to combat cognitive bias, psychologists have found, requires not only awareness of the bias, but also awareness of its magnitude and direction, a motivation to correct it, and some means of correcting it.   And although some areas of law have shown a capacity to address hindsight bias—for example, through evidentiary rules and judicial instructions in simple negligence cases, or pleading and burden-shifting rules in corporate governance and securities litigation—white collar criminal law lags behind in tackling or even recognizing these vulnerabilities.  Neither the rules of criminal procedure or evidence, nor criminal statutes themselves, take into account the pernicious effect of hindsight bias in financial fraud cases. If hindsight bias undermines the law’s ability to distinguish lawful conduct from wrongdoing, it weakens the deterrent value of compliance defenses, and legal decision makers have little chance of encouraging rational risk-mitigation and ensuring the fair administration of justice.

To read more about the effects of hindsight bias in white collar investigations and ways to combat it, please go to the deeper discussion of the problem here:

Combating Hindsight Bias in White Collar Criminal Investigations (PDF: 11.2 MB)

Nicolas Bourtin is a litigation partner and the Deputy Managing Partner of Sullivan & Cromwell’s Criminal Defense and Investigations Group. His practice focuses on white collar criminal defense and internal investigations, regulatory enforcement matters, and securities and complex civil litigation.

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