Hindsight bias and outcome bias in judging directors’ liability and the role of free will beliefs

Abstract

Following a corporate disaster such as bankruptcy, people in general and damaged parties, in particular, want to know what happened and whether the company's directors are to blame. The accurate assessment of directors’ liability can be jeopardized by having to judge in hindsight with full knowledge of the adverse outcome. The present study investigates whether professional legal investigators such as judges and lawyers are affected by hindsight bias and outcome bias when evaluating directors’ conduct in a bankruptcy case. Additionally, to advance our understanding of the mechanisms underlying these biases, we also examine whether free will beliefs can predict susceptibility to hindsight bias and outcome bias in this context. In two studies (total N = 1,729), we demonstrate that legal professionals tend to judge a director's actions more negatively and perceive bankruptcy as more foreseeable in hindsight than in foresight and that these effects are significantly stronger for those who endorse the notion that humans have free will. This contribution is particularly timely considering the many companies that are currently going bankrupt or are facing bankruptcy amidst the COVID-19 pandemic.