Outcome Bias

People judge decisions based on their outcome instead of the process of reaching the decision. This is a flaw that we should recognize and try to avoid as a good outcome can come from a less than ideal decision making process through luck while an unlucky event can lead to a bad outcome even though the decision making process was good.

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We tend to look at the quality of a decision based on its outcome, which is basically focusing on the results and not the process and is more apparent when there are negative outcomes. For example, given the same decision of going to the casino, there are 3 possible outcomes: we win money, we lose money or we have the same amount as when we entered. If we lose money, going to the casino would appear to be a bad decision, but if we end up even or win some money, it wouldn't appear so. The decision didn't change but our perception towards it changed depending on the outcome, which was entirely up to chance.

Looking back at investing, a risky decision to speculate or invest in penny stocks may appear to be a stroke of pure genius if you made money on it while a poor and thoughtless experiment if you lost your pants on them. On the other hand, a well-thought out and analysed decision to invest in a company can also lead to losses, for example if there is an economic recession.

Instead of looking solely at the outcome of the decisions that we make, we should start to put more emphasis on the process that led us to our decision. Was it well thought out and analysed or was it a spur of the moment decision? This is more useful when we make decisions in the future as we are able to learn and improve on the process, which would make a positive outcome more likely in the future.

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