Hindsight Is Always 20/20 in a Bear Market: Fiduciary Tools to Dull the Edge of Hindsight Bias in Trustee Investment Liability Lawsuits – Preparing for the COVID-19 Fallout

After the Great Recession, some courts found trustees liable for investment decisions that, at the time they were made, may have seemed reasonable. Julian Zebot and Nathaniel Ajouri apply lessons learned from the aftermath of the Great Recession to gain insight on how to protect trustees during the COVID-19 pandemic.

Julian C. Zebot and Nathaniel J. Ajouri
Benjamin Franklin on $100 bill

Benjamin Franklin on $100 bill

For the past ten years, during a virtually unprecedented bull market, trustees have not had to worry much, if at all, about investment loss claims. But, as Bob Dylan famously lyricized, “the times they are a-changin',” particularly in light of the uncertain, but likely detrimental, long-term effects of the global COVID-19 pandemic on both the economy and the stock market. Ensuring that a trust’s investment portfolio is robust enough to withstand—or at least mitigate the effects of—a bear market and continues to meet the (perhaps increased) needs of the trust’s beneficiaries will, if it has not already, become a top priority for trustees.

In this regard, there are important lessons to be gleaned from the last major economic downturn. During the Great Recession, as well as in other prior recessionary periods, at least some trustees were found liable by the courts for investment decisions that, at the time they were made, may have seemed completely reasonable. The old adage that “hindsight is always 20/20” has applied to trustee liability for investment loss claims in periods of economic downturn going back even as far as the Great Depression in the 1930s. As we contemplate the possible economic fallout resulting from the spread of COVID-19, preparing for a recession seems like the prudent thing for trustees to do. Maintaining the duties owed to one’s beneficiaries and protecting oneself from the sting of hindsight bias can be a two-birds-one-stone situation. It is important, however, for trustees to act diligently and with full knowledge of their beneficiaries’ needs to help navigate the unknown as best as they can.   



Hindsight bias, sometimes referred to as the “knew-it-all-along” phenomenon, is the demonstrated tendency of individuals, when considering the results of an event after it has already occurred, to overestimate their ability to have predicted the known end result. For example, during the third quarter of Super Bowl LI in 2017, with the New England Patriots down 28-3 to the Atlanta Falcons, the vast majority of observers would have called it a game. But when the Patriots came back to win 34-28—breaking a Super Bowl record in the process—many of the very same observers (but perhaps New England Patriots fans in particular), when looking back on that game, would likely proclaim that they “knew that the Patriots would win all along.”

But hindsight bias is not limited only to situations involving the proverbial “Monday Morning Quarterback.” In fact, its application to legal decision making has been noted quite extensively, particularly in the context of fiduciary investment loss claims. Even some legal standards, such as ones that impute knowledge to parties that “should have known,” invite judges and juries to toe the line of hindsight bias when determining retrospectively whether an individual should be held liable, guilty, or otherwise responsible for the occurrence of a certain event. Commentators, such as Erin M. Harley in her article titled Hindsight Bias in Legal Decision Making, have observed that juries and other legal factfinders are consistently exposed to the “classic hindsight task.” That is, “[p]eople with outcome knowledge (jurors) must attempt to ignore that information, and predict what a foresight judge (the defendant) would have known about potential outcomes.”[1]

In her article, Harley discusses a study that addressed the existence of hindsight bias in the judicial context. In that study, the researchers investigated whether or not jurors are influenced by outcome information when asked to make decisions about punitive damage awards. The participants were split into two groups and asked to review information about a hazardous stretch of train tracks before determining: (1) whether the railroad should be allowed to continue to operate (the “Foresight Group”), or (2) whether the railroad was negligent for continuing to operate (the “Hindsight Group”). All participants had the same set of information; however, the Hindsight Group was provided with the additional information that the train had derailed and spilled toxic materials into a nearby river. Two-thirds of Hindsight Group participants decided that the continuation of train service was reckless and that the railroad should be required to pay damages—as opposed to the only one-third of Foresight Group participants that said the railroad should not be allowed to operate. The study’s results highlight the effect that a known negative result can have on a decision maker’s judgment when asked to look backwards in time in assessing liability.



            Hindsight Bias Involving the Sale of Trust Assets.


Disquietingly for trustees, hindsight bias has shown up in a number of court decisions addressing a trustee’s sale of assets—conduct that is often intended to address the trustee’s recognized duty to diversify the assets held by the trust.

For instance, in First Alabama Bank of Montgomery, N.A. v. Martin, the beneficiaries of approximately 1,250 individual trusts, of which First Alabama Bank of Montgomery was the trustee, filed a class action lawsuit against the bank for what was ultimately determined to be imprudent investment activity. 425 So.2d 415, 417 (Ala. 1982). In short, the trustee sold stock belonging to the trusts at what would later turn out to be “the bottom of the market.” Id. at 428. In holding the trustee liable, the court stated:

It seems reasonable to state that had these stocks not been sold at the bottom of the market, there would have been no loss. It is true that a trustee will not be held liable under ordinary circumstances for losses due to unforeseen depression or recession of the stock market. Yet, where the course of dealing of the trustee is such that it causes the loss, a trustee will be liable. . . . Here, First Alabama sold these stocks at or near their lowest price levels, against the advice of its own trust officer, and at the time the country was just beginning to recover from the worst recession since the 1930’s. 

Id. The effect of hindsight bias on the court is evident in First Alabama. The court, looking back on what had occurred, had knowledge of both the outcome (the investment loss) and the direction that the market took after the sale of stock (its eventual recovery). While the court makes note of the trust officer’s contrary recommendation in support of its decision, it appears largely to have assumed the trustee’s omniscience and rendered a decision as though the trustee was aware that the market would rebound after the sale and not continue to plummet as the court notes it had done prior to the divestment. 

Hindsight Bias Involving the Retention of Trust Assets.

Another situation in which a trustee’s market omniscience was presumed by a court—to the trustee’s detriment—is found in Chase v. Pevear, which was decided around the same time period as First Alabama. 419 N.E.2d 1358 (Mass. 1981). In Chase, the trustee bought a series of shelter industry investments that totaled around 4% of the trust’s investment portfolio. The judge below made the finding that “a 4% investment in the shelter industry was prudent” but ultimately determined that “the trustee should be surcharged because he held [the stocks] too long.” Id. at 364-365.

Between 1970 and 1974, the stocks at issue “rose phenomenally in value.” The court held that “the trustee should be surcharged in the amount of $2,898.82 for failing to sell the stock in August, 1974” when the value began to fall. Relying on “disquieting information” contained in a prospectus issued in October, 1973, and on a recommendation that the stock should be sold that occurred in August, 1974, the court held that the trustee was imprudent for not making the sale. Id.

Although the factual scenario is just the opposite of that presented in First Alabama, the court’s decision, and presence of hindsight bias, in Chase is nonetheless eerily similar. The court, looking backwards, determined when the best point to sell the stock would have been, with all outcome information available to it, and then assumed that the trustee should have known that information at the time.


            Hindsight Bias Involving Poor Investment Strategy in Light of Market Conditions.


Even as far back as 1931, trustees were occasionally held to a standard by courts that required them to, in essence, predict changes in the stock market and proactively react to prevent damage to the trust property. A great and oft-cited example of hindsight bias comes from the decision rendered in In re Chamberlain’s Estate. 156 A. 42, 42 (N.J. Prerog. Ct. 1931). In Chamberlain, the trust’s value “shrunk from over $258,000 to slightly less than $200,000.” Id. Despite noting that “there [was] nothing to indicate any unusual service by the executors in this estate,” that the “shrinkage is due, apparently to stock market conditions,” and that the trustee was authorized to continue investing in the stock market by the estate planning instruments, the court noted:

it would seem to me that common business experience should have suggested to the executors, at least to the Executor Trust Company, which is supposed to be a specialist in this line of work, and holds itself out as such, that immediate sale of these stocks at the then market prices would have been the most advisable, and that their retention might very possibly result in a loss to the estate.

Id. The court further opined, rather strikingly, that “[i]t was common knowledge, not only amongst bankers and trust companies, but the general public as well, that the stock market condition at the time of testator’s death was an unhealthy one, that values were very much inflated, and that a crash was almost sure to occur.” Id. The court ultimately decided, that it was “the duty of the executors to dispose of these stocks immediately upon their qualification as executors.” Id. (emphasis added).

What these cases show, in sum, is that the impact of hindsight bias is not limited to hypothetical railroad accidents and controlled psychology experiments. Hindsight bias can constitute a very real factor in trust litigation and, as such, a very real risk for trustees—even those who reasonably believe they are acting prudently based on the information available to them.

The problems with hindsight bias in fiduciary investment liability litigation have not gone unnoticed.  Attempts at addressing its insidious effects have been made by the drafters of the Uniform Prudent Investor Act (“UPIA”), as well as the states that have adopted the UPIA’s provisions. See, e.g., Minn. Stat. § 501C.0901 subd. 6 (“Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight”). While the adoption of the UPIA’s anti-hindsight-bias provision is certainly a step forward in addressing the issue, the statute—which acts essentially as a reminder to judges to be mindful of the bias—cannot by itself eliminate all biased legal decision-making due to the subconscious manner in which hindsight bias operates.[2] It, therefore, remains vital for trustees to take action in order to prevent the opportunity for judgments tainted by hindsight bias in the first instance.


As was the case during the Great Recession, the economic fallout from COVID-19 seems to be more and more of a reality with each passing day. In February 2020, the stock market reported its largest one-week decline since the 2008 financial crisis, as of April 2020, 22 million Americans had filed for unemployment benefits, and economists have begun to note that these trends look a lot like the Global Financial Crisis (and the beginning of the Great Recession) in 2008 and the Black Monday financial crisis in 1987.

If these similarities continue, then it seems likely—if not probable—that trustees will have to deal with situations similar to those that trustees during past economic downturns confronted. Among other things, as the value of trust investment portfolios drop in value, or losses are locked in upon the sale of assets, one might reasonably expect to see an increase in the number of lawsuits brought against trustees by beneficiaries relating to such investment losses. Whether those beneficiaries claim that there was a failure to diversify, that the trustee sold assets that later outperformed the market, or that the trustee failed to adopt a proper investment strategy in light of the looming market conditions, it is possible, and important, for the trustee to consider taking certain measures that will not only reduce the need for litigation entirely by effectively protecting the beneficiaries’ interests, but hopefully prevent hindsight bias from being weaponized and used against the trustee in future litigation relating to any investment losses suffered by the trust. Where the future is uncertain, as it is now, it is important for prudent fiduciaries to prepare.


A.              Fiduciary Openness and Transparency

Perhaps the most important measure a trustee can take when preparing for an economic downturn, and one that is essentially a prerequisite to the other tools discussed below, is to be as open and transparent as possible with the trust’s beneficiaries. Most states impose a fiduciary duty on trustees to communicate with the beneficiaries of a trust in some manner. For example, the Minnesota Trust Code, Chapter 501C states:

A trustee shall keep the qualified beneficiaries of an irrevocable trust reasonably informed about the administration of the trust and of the material facts necessary to protect their interests. Unless reasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of an irrevocable trust.

Minn. Stat. § 501C.0203. As the comments to the Uniform Trust Code note, these types of provisions exist to “enable the beneficiary to enforce the beneficiary’s rights and to prevent or redress a breach of trust.” But, more fundamentally, the reason to encourage communication with beneficiaries is rather simple—openness and transparency encourage the exchange of information allowing a trustee to make better decisions. In addition, it will allow a trustee to share concerns about any potential economic events that might be anticipated, inform the beneficiaries about these concerns, and gauge whether those concerns are shared by the beneficiaries. Finally, it provides the trustee an opportunity to learn of beneficiary concerns that it may not have been not initially aware of. This open exchange of information allows a trustee to make better informed decisions about the management of the trust, which will ultimately aid the trust in withstanding hardship in the face of economic downturn (and, as is discussed in greater detail below, ensure that the trust is better able to meet the needs of its beneficiaries).

But the psychological benefit of fiduciary openness and transparency is important as well. Poor communication on the part of the trustee breeds distrust and malcontent among the beneficiaries and is a common flashpoint for trust litigation. A trustee who is responsive to beneficiary requests for information and proactively communicates with the beneficiaries is more likely to gain the benefit of the doubt regarding poor investment performance than one who does not.   



B.              Considering the Needs and Goals of the Beneficiaries

No two individuals are exactly alike, and the same is true of trust beneficiaries. In addition to openness and transparency, it is important for trustees to assess the beneficiaries’ needs and goals. For example, will one of the beneficiaries be attending university or going back to school during the potential economic downturn? Is one of the beneficiaries at risk of being laid off or furloughed for a period of time? Sitting down and discussing these considerations with the trust’s beneficiaries can help the trustee decide whether its current investment plan is harmonized with the beneficiaries’ needs and goals, whether the trust requires greater liquidity, or, alternatively, whether the trustee can use a potential dip in stock prices as an opportunity to expand the trust’s equity holdings—eventually benefiting the trust principal through future growth.

Trustees can also likely expect to see an increase in requests for distributions by beneficiaries. Preparing for these distribution requests, or at least deciding how to handle such requests, is an important issue to discuss with your beneficiaries. Being on the same page about distributions in light of a change in employment status is important not only so that an acceptable plan is in place should unemployment occur, but discussing said plan beforehand may reduce the risk of heated disputes (and, further down the road, litigation) in which one side feels blindsided by the actions of the other. In short, discussing the future needs of the beneficiaries during a period of economic downturn not only helps the trustee prepare for situations that may have otherwise been a surprise, but gives the trustee an opportunity to share its plans with the beneficiaries, thereby mitigating the shock and surprise that might otherwise be associated with its actions, and, in turn, potentially reducing anger-fueled or otherwise emotionally driven litigation. 

C.              Beneficiary Approval of Transactions

A step beyond open and transparent communication with the beneficiaries is to seek their consent to the trustee’s plans for managing the trust’s investments. In fact, under what is typically termed the doctrine of ratification, courts across the country have determined that where beneficiaries agree to investment decisions made by a trustee, they cannot later sue for a breach of trust. See Scullin v. Clark, 242 S.W.2d 542, 548 (Mo. 1951) (beneficiaries “who, with full knowledge of the facts and [their] legal rights, consents to or confirms and ratifies a breach of trust, may not thereafter complain”); see also Rajamin v. Deutsche Bank Nat. Tr. Co., 757 F.3d 79, 90 (2d Cir. 2014) (trustee’s unauthorized acts are not void but voidable because they may be ratified by beneficiaries). 

Obtaining beneficiary consent is a prophylactic solution to the problem of hindsight bias in subsequent investment loss litigation. The advantage that beneficiary-plaintiffs have in using hindsight bias is that, having taken no part in the investment decision-making process themselves, they are able to squarely point their fingers at the trustee and argue that the trustee should have known better. Of all the tools available to a trustee, obtaining beneficiary consent or approval of actions the trustee plans to take, after in-depth discussion of these plans with the beneficiaries, helps to eliminate hindsight bias by bringing the beneficiaries into the decision-making process.

Obtaining consent for each and every transaction that you make as a trustee may be unrealistic and, in some instances, impossible as a practical matter. But sitting down with the trust’s beneficiaries and creating a plan that they agree (or at least do not object) to in the event of an economic downturn will not only provide the trustee with a predetermined set of principles to follow—reducing rash, off-the-cuff decisions, it will also potentially eliminate the beneficiaries’ ability to turn around and claim the trustee made the wrong decisions if the trust ends up suffering investment losses.    

D.              Keep Records of Everything

The Uniform Trust Code makes keeping records of just about everything a good piece of general advice for fiduciaries. Section 810 of the UTC mandates that “[a] trustee shall keep adequate records of the administration of the trust.” The comment to this rule mentions that “[t]he duty to keep adequate records . . . is implicit in the duty to act with prudence . . . and the duty to report to beneficiaries.” As such, even in the ordinary course of trust administration, a trustee should be a good record keeper.

But the threat of economic downturn, as well as the increased potential for resulting litigation, warrant even more extensive record-keeping practices. Good record keeping compliments each of the aforementioned tools that a trustee can use to help dull the edge of hindsight bias. For example, rather than merely meeting to discuss a plan for economic downturn, a trustee should consider having each of the beneficiaries sign written meeting minutes or some other document detailing the plan. Rather than having the beneficiaries tell the trustee what their needs will be in the coming years, the trustee should have them draft an email, letter, or other document that clearly documents their anticipated needs and memorializes the factors considered by the trustee in making investment decisions on behalf of the trust. Detailed record keeping will keep the trustee organized, but also provide valuable evidence to the court, displaying the efforts the trustee made to prudently administer the trust and demonstrating the beneficiaries’ awareness of, and involvement in, the decision-making process. In short, careful fiduciary record keeping reduces a disgruntled beneficiary’s ability to later bring action and proclaim in front of a court that “the trustee should have known it all along!” 

E.              Judicial Supervision or Approval of Trustee Accounts

Finally, trustees have a tool readily available to them to not just pull beneficiaries into the decision-making process, but also, to some extent, pull the courts into it as well. By petitioning the court for approval of a trust’s accounts, the trustee can defend itself with the doctrine of res judicata. Judicial approval of those accounts serves as a bar to subsequent claims by beneficiaries challenging investment or other trustee actions disclosed by way of the allowed and  approved accounts. This res judiciata defense can help in preventing a court from deciding later, potentially due to hindsight bias, that the actions of the trustee were not reasonable or contrary to the interests of the beneficiary in retrospect. So, how can a trustee best leverage this tool to obtain an advantage?

Once again, transparency, openness, and full disclosure to the court will cast the widest net, creating the most effective bar to claims by beneficiaries. Proactively seeking consistent and regular approval of trust accounts by the court will ensure that the vast majority of actions taken by the trustee are subject to the benefits of res judicata. Provision of notice to the beneficiaries regarding the ongoing administration of the trust has the additional benefit  of giving rise to additional laches-type defenses—essentially preventing the beneficiaries from bringing claims because they should have brought them following the trustee’s initial disclosure of the conduct in question.




The spread of COVID-19 has created much uncertainty in all aspects of our lives. Our healthcare system is under significant stress, stringent social-distancing limitations may remain necessary to varying degrees for at least the foreseeable future, and the fortitude of the national, as well as the global, economy is being tested. To make matters worse for fiduciaries, the occurrence of judicial hindsight bias is a regularly occurring and, therefore, very real risk for the passive and unprepared trustee. But trustees do not have to live with such uncertainty. While the Uniform Trust Code does not provide any guarantees regarding our collective ability to successfully navigate a global pandemic, it does provide trustees with a number of tools that they can employ to make uncertain times less so. The basic principles underlying these tools are openness, transparency, and communication with the beneficiaries of the trust. By utilizing these tools proactively, trustees can bring the beneficiaries, and the court, into the fray of trust decision making and not only better prepare for the uncertain times ahead, but protect themselves from the sting of hindsight bias in the event that those decisions take a turn for the worse. The times are indeed a-changin’, but—all apologies to Mr. Dylan—if trustees take the time to think twice, they may find some shelter from the (coming) storm.

Julian C. Zebot and Nathaniel J. Ajouri are attorneys practicing in the area of probate, fiduciary, and trust litigation at Maslon LLP, in Minneapolis, Minnesota.

[1] Erin M. Harley, Hindsight Bias in Legal Decision Making, Vol. 25 No. 1 Social Cognition 48, 49 (2007).

[2] Rüdiger F. Pohl and Wolfgang Hell, No Reduction in Hindsight Bias after Complete Information and Repeated Testing, Vol. 67 Issue 1, Organizational Behavior and Human Decision Processes, 49-58 (1996) (finding that even where participants were warned about the hindsight bias phenomenon, and showed that it had affected them in a prior experiment, the amount of hindsight bias remained unaffected).