Hindsight-Biased Evaluation of Political Decision Makers

Abstract

Hindsight bias is a cognitive deficiency that leads people to overestimate ex post how predictable an event was. This paper shows that hindsight bias on the part of voters attenuates politicians' tendency to excessive risk-taking. We develop a political- agency model in which politicians differ in ability, defined as knowledge about the optimal policy, and have to choose between a risky and a safe policy. When their prospects for reelection are bad, low-ability politicians sometimes gamble for resurrection: they choose the risky policy even though its expected payoff to society is negative. We model hindsight bias as a memory imperfection that prevents voters from accessing their ex ante information about the optimal policy. We show that the bias acts as a discipline device that reduces gambling for resurrection and can therefore be welfare enhancing. Although it is well known that restrictions on information acquisition can be beneficial for a principal, our contribution is to show that a psychological bias can have such an effect.