A Sneaky Cognitive Bias Ruining Your Decision Making

Have you heard of “resulting”? It’s also known as “outcome bias”. This is a situation where you evaluate the quality of a decision based on the outcome of that decision.

You might be saying, “But Dr. Eric…what’s wrong with that? If I made a decision and a good thing happened, doesn’t that PROVE that I was smart? And if a bad thing happened, doesn’t that PROVE that I made a mistake?”

To that, I would say, “It depends.”

Let’s say you buy a stock. It could go up and it could go down. Most people would say that if their stock picks went up, it means they’re a genius. However, professional investors, traders, and portfolio managers know that there’s more to it than just profit.

If you randomly picked a stock and generally get your ideas from “tips,” the truth is that your stock could go up. There’s always that possibility. And if you do a ton of research, understand the company inside and out, assess the market conditions, and make an educated guess, the stock pick could go down on you. Does it mean that the research and analysis was for nothing?

Luck plays a role in our outcomes. This is why “resulting” or “outcome” bias exists. It is incorrect to say that a decision is good or bad based on the outcome of the decision. Whether a decision is good or bad should be assessed before the outcome.

What are the markers of a good decision? One that assess as much of reality as possible prior to the decision being made. What are the markers of a bad decision? One that did not capture reality when it could have. This is regardless of outcome.

But what can you do on a practical level? To assess whether your decision was a good one or a bad one:

1. Outline the specific reasons why you made your decision.
2. Assess whether or not there is information you could have known to have improved the outcome.
3. Use the law of numbers to eliminate luck. Keep track of your decisions and look at the trends of your outcomes, not just one outcome. This eliminates luck as a factor.
4. Based on your analysis in (1) to (3), adjust your processes, not your decisions. Better processes incorporate capturing more of reality to improve decision making. This should then lead to a trend of better outcomes over time.

Hope that helped. Let me know if you have any questions.