You start off with a clear future goal and a plan that will help you to achieve this goal.
But the future is uncertain, and we need to have a good understanding of the risks that could cause us to fail at our objectives. We tend to explain the past and predict the future.
One generally hopes to learn from explaining the past and to apply this knowledge to make better decisions in the future. Research suggests that traveling forward in time to look backward on a future event might improve decision making, by helping people see the key risk factors more clearly.
It starts by looking into a “crystal ball” and to see total disaster. We assume the plan did not work and the worst (unwanted) outcome was achieved. What would cause you to fail in your objective? Overconfidence has been identified as one of the worst natural human biases as far as it concerns personal investing.
Prospective hindsight is the concept of imagining that a future event has already happened and then analysing why. You go forward in time and then look back. It is used as a strategic planning technique called a project pre-mortem. A pre-mortem is an exercise where we imagine that a project has failed, and where we work backward to determine what could have led to the failure.
A pre-mortem is a way to manage our optimism bias by projecting ourselves into a future where the project or plan has already failed. It is not about predicting an outcome, but working from a perspective that the plan has failed. It is the opposite of hoping for the best – it is assuming the worst and seeking to learn from these insights.
You imagine a failed future and then ask the question “why did this happen”? Looking into the future the question is more often “what will happen”? This change in perspective is important.
You ask the question: “What went wrong”?
What are the foreseeable causes of failure that are under the control of the decision maker? What can be done to avoid these mistakes? You make better decisions when you have a clear perspective on the actions and behaviors required to get to the desired outcome. The pre-mortem becomes a pointer and a guide to what exactly can be done to bring about a different future.
Every plan’s chance of success has certain areas of weakness that could contribute to failure. It is better to identify what the crucial risk factors are at the outset.
Research conducted by Deborah J. Mitchell, Jay Russo, and Nancy Pennington, found that prospective hindsight—imagining that an event has already occurred—increases the ability to correctly identify reasons for future outcomes by 30%.
A pre-mortem is the opposite of a post-mortem.
A post-mortem allows doctors to learn why a patient has died. It benefits everyone but the patient. The pre-mortem is done at the outset of a project to help you to think and identify the risks that would lead to failure. The pre-mortem method moves the “autopsy” forward.
The benefit of this technique is that it forces people to consider elements of project risk that they may not otherwise think of and to be able to express them in an accepting atmosphere. A pre-mortem financial checklist is very powerful because it was created during rational and calm thought.
It leads to more realistic assessment of a project and identifies important ways of ensuring success by addressing avoidable causes of failure before they happen.
Research by Veinott, Klein, and Wiggins (2010) found that the pre-mortem method leads to a reduction in overconfidence. The pre-mortem method has several benefits besides identifying trouble spots in a plan, reducing overconfidence and promoting discoveries. It is a risk assessment method that works.
The purpose is to identify the actions and decisions that are under your control that would cause your plan to succeed or fail. Post-mortems and wishful thinking lead to unwanted outcomes that could have been avoided if you were mindful at the outset.
The most important risk factors that causes failure in long-term investing relates to investor behaviour and aspects that are under the investors control. A pre-mortem compels you to face up to reality before it happens to you.
Professor Vasti Roodt suggests that a pre-mortem forces us to deal with reality before reality deals with us.
The above article was written and adapted by Marius Kilian.
* “Back to the future: Temporal perspective in the explanation of events”, D.J Mitchel, J.E Russo and N Pennington, Journal of Behavioral Decision Making, Vol 2, Jan 1989.
* “Performing a Project Premortem”, Gary Klein, Harvard Business Review, Sept 2007.
* “Vasti Roodt: Pre-mortem ’n rigtingwyser na wat jy kan dóén” Prof. Vasti Roodt, Rapport, 6 Nov 2022
* “The Pre-Mortem Method – A Practical way to do risk assessment”, Gary Klein, Psychology Today, Jan 2021
* “Evaluating the effectiveness of the Pre-Mortem technique on plan confidence.” Veinott, E. S., Klein, G., & Wiggins, S. (2010).