Outcome Bias- Focusing on the outcomes while ignoring the other factors!
Outcome bias is an inclination when a decision is based on the Outcome of previous events, without regard to how the past events developed.
It does not involve analyzing factors that lead to an event; instead, it plays down the events preceding the outcomes and emphasizes the Outcome. Unlike hindsight bias, outcome bias does not involve the distortion of past events. In Brief, When we evaluate the quality of a decision based solely on the Outcome, we make an error called the Outcome Bias.
Consider one million investor trade on the stock market. They buy and sell stocks entirely at random every day. After one week, about half of the investor makes a profit, and the other half loses. The ones that made a profit stays; those who made a loss are eliminated.
One-half of the investor will still be riding high in the second week, while the other half will have made a loss and eliminated. And so on.
After ten weeks, about one thousand investors will be left — those who have always invested their money well. And after twenty weeks, just one investor will remain — this investor consistently invested in the right stocks and is now a billionaire.
The media pounces on this extraordinary investor, trying to understand its success principles. Perhaps he eats more proteins than the others. Maybe he sits in one corner of the office and meditates. Or perhaps he wakes up at 5 in the morning and exercises. “How to be a successful investor” depicts his investing strategy life.
He must have some magic formula or recipe for success. How else could he perform so splendidly and so consistently?
Outcome bias can be more dangerous than hindsight bias because it only evaluates actual outcomes. For example, an investor decides to invest in real estate after learning a colleague made a significant return on an investment in real estate when interest rates were at a different level. Rather than look at other factors that could have resulted in the colleague’s success, such as the health of the overall economy or performance of real estate, the investor is focusing on the money made by the colleague.
