Counterfactual

What would have happened on the branch that did not occur - the same decision, with the world going the other way.

Example

A position doubled after its largest customer renewed. The counterfactual is the identical reasoning with that customer leaving, which was the likelier branch at the time.

Important

The question is almost always asked after a loss and almost never after a gain, which inverts its usefulness. A result that only looks like judgement because it happened to land is precisely the case the counterfactual exists to catch.

Related terms

• Outcome bias — Judging the quality of a decision by how it turned out, when the result was produced by the reasoning and by chance in proportions you cannot observe.
• Process versus outcome — The distinction between how a decision was made and what it happened to produce. The first belongs to you; the second belongs partly to the world.
• Expected value — The average outcome of a decision if you could repeat it many times: each possible result multiplied by its probability, all added together.

Lessons that explain it

• A good decision can lose, and a bad one can win — Outcomes are made of judgement and luck in unknown proportions. Judging the decision by the result means learning from the luck, which teaches the wrong thing in both directions. (13 min)

All 578 terms in the Investing glossary