A Good Decision Does Not Always Imply Good Outcome – Outcome bias

A Good Decision Does Not Always Imply Good Outcome – Outcome bias

3 investors Steven, Alex, and Brent invest in the stock market for 3 months. Steven makes a profit of 20%, Alex neither makes a profit nor loses money and Brent loses 10% of his investment.

If you have to choose one person as your investment planner, who would you pick?

If you chose Steven, you fell victim to the outcome bias.

Outcome bias

The value of stocks depends on various external factors. Moreover, 3 months is too short a time to make a judgment. Unless you know how to evaluate a good decision in the stock market, you cannot judge the skill of the investor.

Steven might have hit a stroke of luck to make a profit during those 3 months while Brent could have made a rational decision.

Though Brent could be the better advisor, you gave Steven the upper hand purely based on the outcome.

What is outcome bias?

Outcome bias is our tendency to judge a person or a decision based on the result than on the process.

Many a time, the reason for the outcome turns out to be random. But you might assume this randomness to be a masterstroke by the person who made the decision. A lot of successful “gut-feel” predictions are nothing but the effect of the outcome bias.

I Know

On the other end, sometimes good decisions can go wrong too. A decision done with good intentions and enough thought might face criticism due to the wrong outcome.

The outcome bias causes you to think “I knew it.” Such statements are easy to make after you know the outcome.

How outcome bias works

Never judge based on the outcome when random factors can influence a decision.

I am writing a set of posts to help you identify how your brain plays games with you. This article is on the topic – The Outcome Bias. You can read about all the cognitive biases of the mind.

Real-Life Outcome Bias Examples:

1. Possible evacuation of the Pearl Harbor:

Soon after the Pearl Harbor attack, people blamed the US intelligence for not evacuating even when they had intel about a possible attack.

Back in 1941, only primitive technology existed. Besides, intelligence had also received information about a fake rumored attack.

After the attack, the failure to evacuate looks like the blunder. Before the attack, based on the intel, the US intelligence had many such cases where there seemed like a need to evacuate. But can we evacuate the whole Pearl Harbor every now and then? Of course not.

Intel ignores such news often but only when it causes a disaster, people fuss about it.

2. Decision made by a sports team or a captain

good or bad decision

During important sports events like World Cups or the final rounds of leagues, fans root for their team with blood and sweat. During such events, unforeseen random factors can influence the outcome.

For example, a team or the captain makes a move which seems different from the usual tactics. Now whether this tactic gets praised or criticized depends on the outcome.

You would have watched a fair share of cases where such unconventional decisions led to a loss. After the loss people ask, “What was the need for such tactics? Sticking to the basics wins high-pressure games.” However, had the team won, the same people would say, “That tactic was such a masterstroke. Champion teams know how to take make a tough decision.”

Certain decisions are lauded or hated based on the outcome even if the decision did not completely cause the outcome.

3. Nostradamus Predictions

prediction

You can find enough articles on the internet about the shockingly accurate predictions of Nostradamus. But are they so accurate after all? Here is the so-called Nostradamus’ prediction of the 9/11 attacks.

“Earthshaking fire from the center of the earth will cause tremors around the New City. Two great rocks will war for a long time, then Arethusa will redden a new river.”

Nostradamus

People associated center of the earth to the World Trade Center, the New City to New York, 2 great rocks as two towers and whatnot.

After an event, relating the event to generic sentences like these make it seem true. Ironically, no one manages to predict an event before it occurs based on what Nostradamus has written. If Nostradamus could predict the future, why does no one manage to relate an event before it happens?

4. Stock Market Crashes

When stock market crashes occur, most people incur huge losses. In spite of the losses, people claim to have foreseen the crash.

For example, after the 2008 stock market crash, many analysts provided prior signs which seemed to “clearly” indicate the sign of an upcoming crash. Analysts make such claims all the time and the claims turn incorrect more often than they turn true.

Analyzing patterns to find the signs of an event after the event has occurred is no biggie. The real skill lies in doing it before.

Be wary, you might also be a victim of the clustering illusion bias while you try to identify the signs.

How outcome bias affects you?

You reach incorrect conclusions in real life due to the outcome bias. Since the outcome is an easy point to refer to, you judge based on the outcome than the process. You look at the result and decide the rest. You usually assume good decision behind a good result and a mistake or a bad decision behind a bad result.

Here are some examples:

1. Drinking and driving:

Bitmoji Image

You and I have a friend who drinks and drives often. Next time he is about to drink and drive try telling him that he should not risk it. He will tell you, “I have driven safely before.”

His choice of driving after drinking is based on previous outcomes. Similarly, we also feel comfortable to sit in the car driven by someone who drinks and drives often than someone who does it for the first time.

If you look at the process alone, drinking and driving is risky whether a person does it for the first time or the 213th time. But based on the past outcomes, you tend to believe that drinking and driving is safe.

As per statistics and research, a person who drinks and drives once without encountering a cop or an accident turns more likely to repeat it.

2. Assuming expertise:

When you are introduced to a new topic, your first few successes can lead you to believe that you already turned into an expert.

If you enter a casino, you will know what I am talking about. When people visit the casino, they start throwing dice, spinning wheels, dealing cards and more. During their first few rounds, some of them win money. These winnings tend to get their heads.

Many a time we see newbie poker players assuming they won the round because of their supreme talent. The player might have won the round only due to co-incidence. A good poker player is the one who made the right decision given the circumstances, not necessarily the one who won the pot.

In similar cases, you might assume you know enough on a specific topic due to initial success. This can apply to entrepreneur or manager skills, ability to learn a subject, being able to handle a task on your own, etc.

3. Assuming the decision to drive the outcome

You suffer from a cold and visit a doctor. The doctor prescribes you medicine. You come home, gulp it down with a large glass of water. 2 days later, you are brimming with the energy of an Olympic swimmer. You now have great regards for the doctor who prescribed you the medicine.

But do you know if the medicine cured your cold or did your body cure itself on its own? I do not intend to discredit any doctors, but sometimes the outcome is caused by a different reason than what we think. But we fail to check if our decision or action caused the outcome.

In some cases, you cannot evaluate even if you want to. In the example of the medicine curing your cold, you cannot find out whether the medicine cured your problem or your body did. But you are quick to assume that the medicine did wonders.

In the 1980s, New York City attempted an effort to improve itself. During the process, statistics showed that the higher the number of ice creams sold, the higher the crime rate. You obviously know, assuming the sale of ice creams to cause higher crime rate would be an incorrect conclusion.

Simple as it seems, the thought does not always come easy.

4. Assuming you have the ability to predict

You hang out with a group of friends to watch a football match. You predict the half time score right. To your friends surprise you even predict the full-time score correctly. But you very well know that you will not turn into a clairvoyant wizard who can predict the score of all matches. You know your predictions were coincidence or a calculated guess at best.

But in other cases, you might assume inherent abilities to make good predictions. I am sure you feel that about yourself. Don’t lie 🙂

For example, a newly promoted CEO tries a new idea and it works. Another new idea and more success. The executive starts thinking he is better than the other CEOs. Sooner or later he makes brash decisions based on his confidence of prior outcomes. He ends up making a costly mistake and paying the price.

A stock market traders buy one stock, sells it and makes a profit. The same happens a few times and the trader now considers himself to have amazing analyzing skills. He goes big next time only to realize he made a wrong call and loses all the money.

A few right outcomes can lead you to assume a superior skill of prediction.

On the other end, when you try learning a new skill like playing the guitar, you will struggle and make mistakes. If you look at only the first few instances of practice, you feel like giving up because you cannot hit a note at all.

If you stick to the process of practicing, you will soon learn to hit the notes right. If you give up based on the initial wrong outcomes, you will never learn to play the guitar.

A few right outcomes can lead you to believe you possess expertise when you don’t. A few incorrect outcomes can lead you to believe that you are not cut for it.

None of them is the right conclusion to draw.

5. Knowing it all along

told you so

When a kid drops a glass which shatters into pieces you exclaim, “I knew you would break the glass because you kept it on the edge of the table.” Well, if you were aware, why did you not move the glass away from the edge?

You assume knowing reasons more often than you think. After you are stuck in traffic, you claim “I knew we should have taken a different route”. When a secret affair between 2 co-workers comes to light, you say “I knew they had a thing going on.” When it rains on the way, you say, “I knew I should have taken the umbrella but I forgot.”

Even a chimpanzee can claim to know the signs of the event after it occurred. Next time, try doing it before the event happens.

How do you avoid outcome bias?

Like any other bias, you can get rid of the outcome bias. Our brain has a natural tendency to attribute outcomes with success and failure. Since age-old times, we have been taught to measure the effectiveness of a decision based on the outcome.
At times, outcomes do not determine if you did the right thing. In such cases you can ask yourself a few questions:
What caused the outcome?
Could I have followed a better process to make the decision?
Was the decision obvious before knowing the outcome?

What caused the outcome?

Ask yourself was the decision or action the whole and sole reason behind the outcome? Chances are, other factors influenced the outcome too.

Could I have followed a better process to make the decision?

When choosing between two options, you might choose one randomly and achieve success. But would you choose everything in life at random? I hope not.

The right thing to do is, ask yourself, did I choose one option after considering facts and applying thought? If you did, the outcome does not matter. If the outcome goes against your favor, take the time to think about what did you miss while making the decision.

Was the decision obvious before knowing the outcome?

After you had the outcome, you can easily go back to say, “We had information X, why did we not take the right action?”

Now ignore the outcome and only look at information X. Do you think making a decision or taking action solely based on information X was easy? I doubt it.

Conclusion

You will fall for the outcome bias even if you are aware of it. Try making a note of all the conclusions you make after you have the outcome. Also, make a note of the predictions you make before the outcome. You will know how poor your predicting and forecasting ability is.

Do not turn judgmental based on the outcome. Neither does a bad result imply a bad decision nor does a good result imply a good decision. So, do not bang your head against the wall when things go wrong or praise yourself to glory when things go right.

Trust the process of making the right decision and enjoy the journey. Stick to the method irrespective of the result.

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2 comments
  • Outcome bias is a problem because it leads us to repeat poor decision making based on outcomes rather than on the process used to obtain the outcome. The consequences of this are not always severe (or the bias would not exist) but they can be. It is almost always better to make an informed decision than to make a decision based on gut feelings, in haste, etc. as this gives you a much higher chance of a successful outcome.

    • Rightly said. In most cases, the consequences are not really severe. But in some cases like investments in the stock market, the losses can be humongous.

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