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.

Example

Two people make the identical decision on the identical evidence and one of them loses everything. The reasoning was the same in both cases, so the two results cannot both be evidence about it.

Important

Held loosely, this becomes a way of explaining every loss as bad luck and every gain as judgement, which is the same bias with better vocabulary. It stays honest only if the reasoning was written down beforehand and compared in aggregate with what actually happened.

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.
  • 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.
  • Decision journal — A written record of why a decision was made, written at the time it was made, and never edited afterwards.

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)
  • A short review you actually do beats a thorough one you abandon — Decision journals fail through ambition. A fixed, brief monthly pass over recent entries and a longer annual review are enough to produce most of the learning. (9 min)
  • Record the decisions where you said no, or you only learn from half your judgement — Journals usually cover what was bought. The opportunities you declined are an equally large source of learning, and the only way to know whether your reasons for saying no were sound. (10 min)

All 578 terms in the Investing glossary