Outcome Bias In Investing. Howard Marks Inspiration from the World of Sports Memo. Establishing an investment philosophy and investment process based on thorough research testing will help investors make the right investment decisions.
We fail to factor in randomness contributing to the outcome. Abstract and Figures We document outcome bias in situations where an agent makes risky financial decisions for a principal. Outcome bias arises when a decision is based on the outcome of previous events without regard to how the past events developed.
The tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made.
Resulting means people treat the outcome as an inevitable one rather than a probabilistic one. To avoid the outcome bias investors should be aware of the randomness in the market. Susceptibility to financial frauds participation in investment bubbles performance chasing and excessive short-term trading. Outcome bias describes the phenomenon by which evaluators tend to take information about the outcome into account when evaluating the quality of a decision itself Baron and Hershey 1988.