Monthly Archives: March 2022

Outcome Bias

Dear Patrons,

Outcome Bias

A story to start with,

Say one million monkeys speculate on the stock market. They buy and sell stocks like crazy. What happens? After one week, about half of the monkeys will make a profit and the other half a loss. The ones that made a profit can stay; the ones that made a loss goes home. In the second week, one half of the monkeys will still be riding high, while the other half will have made a loss and are sent home. And so on. After ten weeks, about 1,000 monkeys will be left — those who have always invested their money well. After twenty weeks, just one monkey will remain — this one always, without fail, chose the right stocks and is now a billionaire. Let’s call him the success monkey.

How does the media react?

They will get hold on this animal to understand its *success principles* and even if there is none, they will find reasons to support it: perhaps the monkey eats more bananas than the others. Perhaps he sits in special corner of the cage. He must have some recipe for success, right? How else could he perform so brilliantly perfectly for twenty weeks? – Impossible!

The monkey story illustrates the outcome bias. We tend to evaluate decisions based on the result rather than on the decision process.

Never judge a decision purely by its result, especially when randomness or ‘external factors’ play a role. In current uncertain scenario where result is completely non predicable. Every day is unfolding with new set of challenges. We have only one line to say to investors in this scenario,

Market wants you to act, but don’t react.