Altogether Obvious: Hindsight Bias and the Evaluation of Innovations

Searching for new ways to use existing ideas is an important aspect of innovation and can involve a great deal of ex ante uncertainty. The paradox is that the outcomes of this search often seem obvious when viewed in hindsight. I examine the degree to which hindsight bias affects the evaluation of obviousness in the patent examination process. If examiners are relying only on ex ante knowledge to assess obviousness, then inventions should seem less obvious when examiners are less familiar with the underlying areas of technology. If, on the other hand, examiners rely on ex post knowledge of the outcome when they have less ex ante knowledge, i.e. hindsight bias, then inventions will seem more obvious when examiners are less familiar with the underlying areas of technology. I test this hypothesis using a novel data set on claim rejection rates for granted and rejected patent applications. I find that claim rejection rates due to obviousness are higher when examiners are less familiar with the underlying technologies in an application. Additional analysis of the kinds of citations that examiners use to make obviousness rejections, the kinds of objections that applicants raise in response to rejections, and the rates at which examiners reverse rejections in light of applicants’ objections provide further evidence consistent with hindsight bias in the evaluation of innovations.