Outcome Bias

DEFINITION of 'Outcome Bias'

A decision based on the outcome of previous events without regard to how the past events developed. Outcome bias does not involve analysis of the factors that lead to a previous event, and instead de-emphasizes the events preceding the outcomes and overemphasizes the outcome. Unlike hindsight bias, outcome bias does not involve the distortion of past events.  

BREAKING DOWN 'Outcome Bias'

Outcome bias can be more dangerous than hindsight bias in that it only looks at outcomes. For example, an investor decides to invest in real estate after learning a colleague made a large return on 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.

Gamblers also fall prey to outcome bias. While statistically casinos come out on top, many gamblers use anecdotal "evidence" from friends and acquaintances to justify their continued playing. This outcome bias, that continuing to play could result in winning a large amount of money, prevents the gambler from leaving the casino. 

RELATED TERMS
  1. Unconditional Probability

    The probability that an event will occur, not contingent on any ...
  2. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  3. Applied Economics

    The application of economic theories and principles to real world ...
  4. Two-Way ANOVA

    A statistical test used to determine the effect of two nominal ...
  5. Conditional Probability

    Probability of an event or outcome based on the occurrence of ...
  6. Three-Way ANOVA

    A statistical test used to determine the effect of three nominal ...
Related Articles
  1. Investing

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  2. Investing

    Effects Of Behavioral Biases In Investing Decisions

    Investing, just like our day to day activities, is primarily driven by our behavioral patterns and general thought processes.
  3. Managing Wealth

    Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.
  4. Trading

    5 Mental Mistakes That Affect Stock Analysts

    They know more about stocks than the average person, but analysts are still affected by biases. Find out what they are.
  5. Investing

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  6. Financial Advisor

    Advisors: Watch Out for Confirmation Bias

    Here's how advisors can make sure that confirmation bias does not color their own perceptions as they manage clients’ portfolios.
  7. Investing

    9 Cognitive Biases That Affect Your Business

    Human beings often act irrationally when it comes to business decisions. Behavioral finance explains the difference between what we should do and what we do.
  8. Investing

    Casino Stats: Why Gamblers Rarely Win

    Gambling is never a reliable source of supplementary income. Read on to find out why.
  9. Markets

    Top Reasons Stock Indices Could Be Biased

    Do the owners of the large stock indices (McGraw Hill Financial, CME Group, and News Corp) have incentive to pick stocks to put in the index that are "shiny" as a marketing ploy? And if so, wouldn't ...
  10. Trading

    Multivariate Models: The Monte Carlo Analysis

    This decision-making tool integrates the idea that every decision has an impact on overall risk.
RELATED FAQS
  1. What is the difference between speculation and gambling?

    Learn about speculation and gambling, examples of speculation and gambling, and the main difference between a speculator ... Read Answer >>
  2. Why can real estate be a good addition to a traditional stock and bond portfolio?

    Discover why real estate can be a good addition to a traditional stock and bond portfolio. Real estate is affected by economic ... Read Answer >>
  3. How can I use expected return with my risk profile to make an investment decision?

    Understand the basic concepts of expected returns, risk tolerance and risk-adjusted returns, and how investors use these ... Read Answer >>
  4. How did moral hazard contribute to the financial crisis of 2008?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ... Read Answer >>
  5. Which sectors have similar pros and cons to the drugs sector?

    Discover some industries that are similar to the drug sector and look at ways to spread risks in these high-risk, high-return ... Read Answer >>
  6. What are the differences between investing in real estate and stocks?

    Invest in real estate by purchasing physical property or buildings, or invest in stocks by buying a claim to a company and ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center