Outcome bias

Vishal Khandelwal explaining outcome bias.

…Outcome Bias, which leads us to judge the quality of a decision based on its result, instead of the thought or process that went into it.

So, as long as the outcome is favourable, we assume the decision was good. When it turns out badly, we blame the decision, even if it made perfect sense at the time.

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The real problem is that outcome bias not only distorts our view of the past, but that it shapes our future decisions. If a bad decision leads to a good result, we often reinforce it. We do it again. Worse, we up the stakes. It becomes a habit. And like my friend, we trust the pattern until it breaks. When that happens in investing, it may lead to financial ruin.

Outcome bias also leads us to punish good behaviour unfairly. Imagine someone who stuck to their asset allocation plan, avoided chasing hot stocks, and rebalanced regularly, but ended up underperforming in a year when speculative bets did well. That person might feel foolish, even though they followed a sound process.

The irony is that the more disciplined your process, the more often you’ll look wrong in the short term.